The limits to upgrading and value capture in R&D global value chains: Indian and Chinese contract R&D firms in the integrated circuit design and pharmaceutical global value chains

Abstract

This article analyzes the interaction between lead firms and Chinese and Indian contract research and development (R&D) firms in integrated circuit (IC) and chemistry-based pharmaceutical global value chains (GVCs) in order to delineate what factors influenced the upgrading and value capture outcomes of these contract R&D firms in the two sectors. There are five main findings. First, the two sectors differed significantly in terms of the upgrading of contract R&D firms’ activities and capabilities. More upgrading was found in chemistry-based pharmaceuticals than in ICs. Second, in both industries, lead firms utilized a range of strategies to control and limit upgrading and value capture by contract R&D firms. Third, level of R&D uncertainty (risk) and lead firms’ level of market access control informed the strategies of lead firms. Lead firms generally adopted strategies to limit upgrading by contract R&D firms except in two situations: where R&D risk was high so that lead firms wished to offload costly risks onto contract R&D firms and where lead firms had significant market access control to limit value capture by upgrading contract R&D firms. Fourth, the strategies to limit upgrading included minimizing the flow of information possible in modular linkages and discouraging IP development by contract R&D firms. Fifth, the lead firm strategies to limit value capture included limiting upgrading and thus any associated potential value capture, enhancing lead firm bargaining leverage, and controlling market access via established market channels and continual engagement with regulatory agencies in relevant markets.