The New Global Community

ernest madara asked:


Introduction

An Enterprise Resource Planning (ERP) system covers the techniques and concepts employed for the integrated management of businesses as a whole from the viewpoint of effective use of management resources, to improve the efficiency of an enterprise. They have many advantages both direct and indirect. The direct advantages include improved efficiency, information integration for better decision making, faster response time to customer queries etc. The indirect benefits include better corporate image, improved customer goodwill, customer satisfaction, and so on.

Many organizations and businesses in the world today as part of their strategic development plan, advocate for ERP solutions which would help to re-engineer their business processes in order to accomplish their long-term goals.

The ERP market is very competitive and fast growing market, which is attributed to three primary factors:

a) ERP vendors are continuing to expand market presence by offering new applications such as supply chain management (SCM), sales force automation, customer relationship management (CRM) and human resource.

b) To sustain their rapid growth, ERP vendors sell more licenses into their installed base.

c) While ERP originated in the manufacturing market, ERP usage has spread to nearly every type of enterprise including retail, utilities, the public sector and healthcare organizations.

Among the industry players include SAP (Systeme Anwendungen Produkte), Oracle, QAD, SSA, Jenzabar, Datatel, Peoplesoft, Baan, JD Edwards, Scala, Navision, Sungard just to mention but a few. Even within themselves they categorise each other into High-end and low-end range. In Kenya a cross section of companies are indeed on the warpath of undertaking or planning to invest in an ERP business solution. The future will see fierce battle for market share resorting to mergers and acquisition for strategic and competitive advantage.

There is much hype when the vendors are out to move their products, and will always sell and tell you about their success stories and how you will leapfrog into your vision. They never tell you of any failures of such ERP projects, and there seems to be no attention paid to lessons learnt from the famous FoxMeyer Corporation scenario, which lead to its bankruptcy and the lengthy legal battles in the courtrooms with their consultants thereafter. “My basic principle is that you don’t make decisions because they are easy, you don’t make them because they are cheap, you don’t make them because they are popular but you make them because they are right”- Theordore Hesburgh.

If not properly planned for, the investment may drive you out of business. The epicenter for the problems that rock the corporate world as far as ERP or in general IT project failure is concerned has remained the same over the years.

The following examples are typical of the projects that failed from statistics available from The Standish group CHAOS database

· The Hershey foods ERP system implementation failure lead to massive distribution problems and loss of 27% market

· The FoxMeyer drug ERP system implementation failure lead to the collapse of the entire company

· The IRS project on taxpayer compliance took over a decade to complete and cost the country unanticipated $50 billion

· The Oregon Department of Motor Vehicle conversion to new software took eight years to complete and public outcry eventually killed the entire project

· State of Florida welfare system was plagued with numerous computational errors and $260 million in overpayments

· AMR Corp, Budget Rent A Car, Hiltons Corporation, Marriott “ confirm” project crumbled having spend over $125 million over four years

· Snap-On Inc project to convert to a new order-entry costed the tools company $50 million in lost sales for the first half of 1998

· Greyhound Lines Inc. “Trips” reservation and bus-dispatch system” failed having spent $6 million

· Norfolk Southern Corp. “Systems integration with merger target Consolidated Rail Corp”. failed having lost more than $113 million in business

· Oxford Health Plans Inc. “New billing and claims-processing system based on Unix International and Oracle Corp. databases” resulted in hordes of doctors and patients angry about payment delays and errors.

· Universal Oil Products Project “ Software for estimating project costs and figuring engineering specifications” resulted in unusable systems

IT projects regularly fall short – and quite few are abandoned entirely. Many IT failures have to do with perceptions and expectations rather than absolute bankruptcy of purpose. Most of the so called failures are better classified as “discouraging successes” events wherein the major purpose is accomplished, but not without a good deal of frustration and inefficiency – and a sour taste in the mouth of many users.

Project risks

The FoxMeyer Corporation Delta III project had the following project risks

i) Environmental- the management had little or no control. They depended 100% on consultants and vendors who obscured them from gaining control. The focus of the project dramatically changed prompting the projects costs to escalate

ii) Execution- the project lacked skilled and knowledgeable personnel. FoxMeyer did not have the necessary skills in-house and was relying on Andersen consulting to implement SAP R/3 and integrate it with an automated warehouse system from Pinnacle. Over 50 consultants were inexperienced and their turnover was high.

iii) Scope- FoxMeyer was an early adopter of SAP R/3. After the project began, FoxMeyer signed a large contract to supply university health system consortium (UHC). This event exacerbated the need for the unprecedented volume of transactions on their HP servers which they could not cope

iv) Customer mandate – the commitment from the top management and users. This was not the case for some of the senior management. There was a morale problem among some of its warehouse workers. The pinnacle warehouse automation integrated with SAP R/3 threatened their jobs. With the closing of the three warehouses, the transition to the first automated warehouse was a disaster. Disgruntled workers damaged inventory, and orders were not filled, and mistakes occurred as the new system struggled with volumes of transactions

Project Factors

Factors that attribute to escalation of costs include but not restricted to

a) Project factors- there was a perception that continued investment could produce a large payoff. FoxMeyer expected a saving of $40 million annually.

b) Psychological factors- the consultants had prior history of success that encouraged them to continue the project. “we delivered an effective system, just as we have for thousands of other clients” (Computergram international 1998). This created the impression that the project would radically improve the company’s critical operations. FoxMeyer bit more that what it could chew but embarking on a fast track project with unskilled staff.

c) Social factors- the consulting company did not externally justify the project. De-escalating the project through abandonment would have meant bad publicity

d) Organization factors-The advocates for the project later were forced to resign because of the delays in realizing the projected savings. A change in management was needed in order to control the increasing costs – which was too late.

Recipe for failure

· When the management is not controlling the scope of the project especially when you expect the consultant to provide a magic bullet, is a recipe for failure.

· Changing the sails in midstream, by certain deliverables expected within a third of the documented times and volumes is a recipe for failure.

· By engaging in other corporate projects competing for the meager finances midway, is a recipe for failure

· By not having proper change management policies and procedures, is a recipe for failure

· By going for consultants without prior experience or ERP solutions in which you are the only company within your industry, could be a recipe for failure

· If you do not have a knowledge transfer inscribed in the consulting contract, is a recipe for failure

· If the vendor does not understand your business, is a recipe for failure

· If the project has no clear phases, deliverables and quality control components, is a recipe for failure

· If you have not re-engineered your business processes to be compatible with the capabilities of the technology, is a recipe for failure

· Having multiple vendors within the one project, is a recipe for failure

· Not having an external project audit committee, is a recipe for failure

· Not having a clear end-user training program to transfer skills to employees, is a recipe for failure

· Having the project run as a “one-man show”, is a recipe for failure

· Having the management over- committed (excessively ambitious, prompting unrealistic deadlines), is recipe for failure

· Team member not being accountable for actions, is recipe for failure

· Low morale within team, is recipe for failure

· Unclear statement of requirement, is a recipe for failure

· In no standard implementation methodology use, is a recipe for failure

· Inadequate requirements definition (current processes are not adequately

addressed), is a recipe for failure

· Poor ERP package selection (the package does not address the basic

business functions of the client), is a recipe for failure

· Inadequate resources employed by the client, is a recipe for failure

· Internal resistance to changing the ‘old’ processes, is a recipe for failure

· A poor fit between the software and users procedures, is a recipe for failure

· A bottom up approach is employed (the process is not viewed as a top

management priority), is a recipe for failure

· The client does not properly address and plan for the expenses involved, is a recipe for failure

· If any functional gaps have not been identified (GAP analysis), is a recipe for failure

· If the implementation does not take into account future technological convergence, is a recipe for failure

Conclusion

The lessons learnt from the failed ERP projects should be a wake-up call for corporations currently in ERP projects or contemplating to go that way. The lessons learnt can as well, serve as a harbinger for failure or bankruptcy by serving as the jetty for launching the rocket to propel you out of the business orbit. The experiences highlighted provide a litmus test on how to avoid ERP failure. There is one final aspect to be considered in any degree of project failure. All success is rooted in either luck or failure. If you begin with luck, you learn nothing but arrogance. However, if you begin with failure and learn to evaluate it, you also learn to succeed. Failure begets knowledge. Out of knowledge you gain wisdom, and it is with wisdom that you can become truly successful.

References

Alexis Leon, “ERP Demystified”, 2000

Judy E Scott, “The FoxMeyer Drugs Bankruptcy”, 2004

Kim watch “Future Watch”, 2000

Lloyd Rain “ IT Project Failures”, 2005

Computerworld “Top 10 Corporate Information Technology Failures”, 2000



Christie

RonnieWilliams asked:


Hawaii, which can be described as one of the most spectacular places on planet earth, is also a place where people prefer to spend their vacations and break off from their routine life. However one need not feel that they will be completely cut off from the rest of the world while spending their vacations in Hawaii.

This is one region which has a very good Hawaii internet news network and environment news service for the aid of people. A large number of people who need to access internet for business or entertainment purpose can heave a sigh of relief. While vacationing in Hawaii, they won’t be left cut off from the rest of the world and internet, courtesy internet news network, Hawaii.

People located in Hawaii can now have access to the latest facilities and high speed internet in a jiffy. Moreover people can have access to internet facility even on their wireless phones, laptops and other GPRS enabled wireless devices. This has been possible because Hawaii has a well and evenly distributed network of cell sites and bolsters coverage throughout.

Individuals can have access to world news and know about the latest happening around the world easily, with the help of Hawaii internet news networks which are highly efficient and provide premium service throughout the country. The climate in Hawaii is very unpredictable one. It could be bright and sunny one moment, while raining cats and dogs in the next moment. In such situations, it becomes extremely important to have crucial weather forecasts made available to the people here. Networks, such as environmental news network in Hawaii are some of the best news network organizations which provide people with reliable weather predictions and news all through the day.

Hawaii is a region which has a well-versed connection of local news networks which make sure that even the smallest detail about Hawaii local news and environmental news network is made available to the viewers instantly. Local news, on a plethora of topics, such as everyday happenings, crime rate, latest occurrences, changes in the society are well covered by these Hawaii local news channels in an impeccable manner.

Apart from covering the local news, Hawaii news network also bring about a host of information on a number of topics, such as local and international sports, business, classifieds and advertisements. Hawaii is a region which is frequently subjected to eruption of volcanoes. The latest updates about volcanoes, too are reported in the news channels under the section of environmental news section. The environmental news service being provided by Hawaii news networks helps to alert the masses about the various areas which should be strictly avoided for the fear of volcanoes or the regions which can be visited owing to their pleasant weather.

There are a number of mediums available when it comes to Hawaii news networks. Some of the most popular mediums available include the internet which is available for the masses all year around, at any and every time of the day. Other mediums include the cable television, weather announcements and updates on the radio and newspapers which are widely circulated all over the region.



Todd

Matthew MacLachlan asked:


The opportunity of an overseas assignment can be an enriching experience enabling personal as well as professional development. This of course necessitates change which will inevitably present some challenges as well as opportunities. Adequate preparation for change is essential to ensure a smooth transition and also requires good communication.

Open and honest communication is necessary right from the beginning. From the skills used in informing the employee of the international opportunity through to how it is discussed with the partner. Just as important also is how children and extended family receive the news. Without good communication there will not be the necessary support to enable greater adaptability and less vulnerability to stress.

Changes will take place within the interpersonal relationships of the couple and the family. Living away from easy access to familiar sources of support, individuals often become more dependent on each other. There is the opportunity to get to know each other in a different way and the possibility to grow and develop a special bond together. This is dependent on open communication which means firstly negotiating and making time for each other. Healthy communication has to be a two-way process of expressing emotions and feeling heard and accepted.

Solutions may not always be necessary. Making time for each other to share feelings and patient understanding may be all that is required.

Children need communication as well. They need to be prepared and to be told what is happening and as early as possible. This includes children as young as two years as they are at the life-stage of beginning to develop attachments and need security. They have to be able to say goodbye to friends and family left behind and to be reassured that they will see each other again. It is also very important at this time of change to maintain a routine of familiarity.

Communicating with children needs to be as concrete as possible, telling them the reason according to their developmental age why the family are moving and where they are moving to. Reassurance and honest replies to questions, as well as making time for cuddles, hugs and being close, all play a part. Children should be encouraged to express their feelings and space and time provided for children to talk and to be listened to when they do.

With older children there is also a need to be aware of each others feelings and to encourage expression of feelings as well as sharing in and giving each other support. Adjustment takes time. This is normal. With patience, understanding and good communication the family will have grown together and shared in a very special experience.

Cultural adaptation, living conditions including children’s health, welfare and education and the opportunity to discuss family experiences first-hand can be included within the highly successful customised family briefings at Farnham Castle and make a valuable input into this important transitional period.

Original article at www.intercultural-training.co.uk



Kareem

Flor Ayag asked:


THE military was in full swing. Motorized troops rumbled past the president’s stand while warplanes thundered overhead. Suddenly a military truck pulled up in front of the official tribune. Several armed men jumped down, threw grenades onto the dais and opened fire with automatic weapons. Within seconds Egypt lost its president, Anwar el-Sadat. And within hours the whole world was able to witness the scene, as if present. TV-news technicians had once again done a remarkable job.

On-the-Spot News Coverage

The assassination attempts on President Reagan and Pope John Paul II, even the abortive coup d’etat in the Spanish Cortes, or Parliament, were all flashed onto television screens shortly after these unforeseen dramatic events took place. Better still, TV newscasts often provide simultaneous coverage of events for audiences halfway around the world from where they are happening.

Seeing the space shuttle actually land with uncanny precision on a dry lake bed in a California desert is surely more impressive than merely hearing a radio newscaster announce that the shuttle is back safely. Similarly, when people see the damage done by a flood in India or an earthquake in Italy and actually witness the human suffering, they can manifest fellow feeling and be moved to contribute to relieve it. All of this can be put on the credit side of TV news.

An Insidious Danger

There is, however, a debit side. A report on Japanese TV, published in Paris by the International Herald Tribune, quoted social psychologist Professor Ishikawa as saying that the major commercial TV stations “sugarcoat news and “do not tell the truth. The report also quoted Tadashi Okuyama, publisher of a Japanese TV guide, as stating that television “is the most influential medium in the nation.

What is true of Japan is true, to a greater or lesser degree, of many other lands. Television has become an “influential medium in practically every country of the world, but that influence is not always good. Even when TV stations are completely independent of any government control, powerful lobbies or rich advertisers can influence news coverage in fields of religion, industry and politics. Slanted news is a subtle form of censorship.

This danger is obviously compounded in countries where radio and TV broadcasting is a State monopoly. The temptation is great for governments to use this “most influential medium for propaganda purposes. This can be done barefacedly, as in totalitarian lands, or in more subtle ways. Selfish interests can slant and distort the facts by showing only one side of a story.

So, even when watching a TV newscast, it is good to remember what television can do FOR you and TO you. In addition to shaping your thinking, TV can also affect your health.



Earlene

Bloomberg asked:

Singh seeks support for India Nuclear Deal, after surviving vote; Britain’s doctors to face Annual Performance Test, Times says; Afghanistan’s police force needs 2300 more trainers, US says; London’s $32 billion crossrail wins final approval; Last town e

Bobby

Sourav asked:


The significance of news has been there while the world came into way of life. Earlier in India, the people were made conversant about the latest news through a number of informers especially kept to tell about the events. This later grew into the information being given out with the help of drums and the drum beaters would be given so much magnitude. Now, the scenario of current news has changed to a large extent. It is because of the technological encroachment in the field of information technology that has made the broadcasting of news more stylized.

 

With the ease of use of so many sources to access India news, the people have the choice of selecting the easiest one available to them. We can check out such news through radio, news channels, websites and newspapers. All these means help us to get the right and authentic information at the right time. In fact, it has made us enthusiastic to such an extent that every day starts with news and ends with news sections. In fact, it is a piece of information that is meant to let somebody know about the events happening nationally or internationally.

 

No matter what all event or misfortune is happening in the world, we care for getting informed and keep ourselves modernized on the latest news India. Being the excellent and conscientious citizens of India, we all have the right to be informed about issues taking place in the country. A news piece helps to engender discussions that can last till the resolutions are made. After all, it is always important to increase our general knowledge and should keep ourselves abreast of latest happenings. Moreover, it is essential to know all the news because no one knows that what piece of news may be helpful for you at what time.

 

Recently, the elections news is always shown on the television or in newspapers or on radio channels. These tell you about the various campaigns that are being run by different parties. Apart from this, you also get to know about the number of seats allotted to various candidates and the areas from where they are contesting. Along with all this information, an interesting part of elections news is the controversies that crop-up between leaders and the kind of comments they give to each other. For e.g. the recent news related to election have been Sanjay Dutt appointed as Samajwadi Party’s General Secretary, BJP contender Varun Gandhi been sent to Jail and Lalu Yadav speaking bad about Varun Gandhi.



Zane

lamara qoqiauri asked:


Characteristic feature of modern world industry is not only free trade in goods and services, but also free movement of a capital. In different regions all over the world, a stock exchange listing, rates of interest and course of currency are interconnected. World financial markets and capital markets significantly influence on financial-economic conditions; Moreover, international investment capital plays an important role in financial development in separate countries as well as in the regions all over the world. Above mentioned condition helps through “the inflow” of investment capital in highly-profitable countries; Conclusion: World financial and investment markets are increasing.

   It must be said that a maximum intersubstitution of production factors is necessary for the development of the world financial system, that on its side is conditioned by the world mobility of investment capital. Financial capital compared with physical investment, because of its mobility occupied a leading place in the world financial system, as it has more opportunities for avoiding the countries characterized by strict regulation of currency and taxation. Most of the countries try to attract and maintain a capital. The problem of creating attractive economic conditions for investment capital is becoming more and more active.

   Discussion of international investment problems creates the necessity of reviewing formation history of the world debt system. The system of international indebtedness started forming at the beginning of 1970s. A failure of Breton-Woods’ system in 1971 and the first oil crisis in 1973 can be discussed as an initial base. Since, banking activity in many countries has been relied on a state regulation. Above mentioned, first of all was caused by the lessons of great depressions and crises in 30s of the last century. As banking safety always occupied the first place in economy, profit was not considered as the first-class problem and banking shares were not considered any more as the means of attractive instrument for increasing capital. Although, the catalysts of new progressive ideas had already been appeared in the world market of a capital. Namely: First International City Bank of New York and Bank of America. e.g. this last, had chance to attract 20 times more funds, in comparison with its own capital. It was an unusual fact for that time.

BASIC STAGES OF INTERNATIONAL EXTERNAL

INDEBTEDNESS PROBLEMS

  

   The last 20 years of aggravation of international external indebtedness problems, can conditionally be divided into three articles. As if, each article corresponds the characteristic stage of the world endebtedness problem. Moving process from one stage to another, first of all is depended on a complicated interrelation between debtors and creditors, and also on characteristic concrete conditions of each participants of a given process.

   ARTICLE I. 1980-1985. In this period, size and structure of indebtedness of developing countries was changed. Among them countries with average income become the debtors of the rightful participant of world financial system – large commercial banks. After, total sum of indebtedness was in surplus compared with the capital of credit organizations and nonfulfilment of engagements, predicted by credit contract, exposed international banking system to danger. The second part of indebtedness was over the official creditors.

   On this stage or world debt system development, debting crisis was perceived as a result of short-term liquidity problem. In order to return solvency to developing countries and their economic development not to be delayed, continuation of debt payment terms was offered, as well as qualitative improvement of macroeconomic system. The most special danger for the world financial system were big countries with average income (Mexico, Brazil). In the field of indebtedness, because of uniqueness of a situation, creditors agreed to discuss a crisis of each country separately. For the world financial system in the development of tactics with similar strategic meanings, it was necessary to expand goods and service markets and also to make reasonable economic reforms through the countries. In a new strategy, a basic role was given to International Currency Fond (ICF) and World Bank.

   ARTICLE 2. 1985-1989. In the middle of 80s, nonfulfilment  of conditions,  predicted by credit contract by capital debtor countries of world financial markets (at the same time, characterized with average incomes),was less dangerous for the world financial system from the viewpoint of improving overall balance of commercial banks. Same time, it was clear that a range of economic problems of debtors had much more structural nature than supposed as social and political factors in this or that country are one of the reasons for a brake on the development in the field of world debt. Besides, a capital flow-out from these countries took place, for the purpose of getting higher and stable norms of profit. Nonexistence of appropriate economical reforms in the countries, was making a flow-out problem more difficult and aggravating the difficulties, connected to taxation balance.

   In this situation, it become unavoidable that, the conditions of debt restructuring, to be looked through by creditors for the purpose of continueing its liquidating period. But, the capitalization of percents and the new credit by commercial banks and international financial organizations, reduction of liabilities or a size of its services was not planned.

   Simultaneously, new funds were given to debtor countries by commercial banks and international financial organizacions, for keeping investment level. (that significantly helped them to cover debts), i.e. we can come to the conclusion. Characteristic problem of discussed period is – heavy liability of developing countries, that is qualitatively and quantitatively different from the same problem compared with one of large and average profitable countries. Comparison of the size of liability with their economical potential was caused by heavy economic conditions of developing countries.

   Distinctive peculiarity of these countries was clearly revealed – dependence on large scale goods and exportable ones (besides towards one or two kinds of goods). Therefore, significant reduction in trading in these goods makes a negative influence on the service of debts, not to say anything about renovation of economic growth. All the above mentioned sircumstances, stipulated the necessity of revising the conditions of covering debts.

   At the annual meeting of World Bank and ICF in 1985, a finance minister J. Baker announced the world indebtedness system development for this period. Mentioned strategy can be characterized with the following: by an experiment in correction of occurred activities in the given period, considering financial realities in debtor countries and by this acknowledged fact, that problems of debtor countries exceeded a temporal crisis of liquidity several times, because of the difficulties and structure of their country problems. First it was possible, that regulation of the world indebtedness crisis didn’t demand for a great importance. But in spite of an absolute agreement in questions of indebtedness crisis between debtor and creditor countries, a basic strategy of the latter ones was kept the same: Maintenance of creditors’ assets value through proper payments of current service on external debt. Above pointed sircumstance caused an objective complication in the process of the world indebtedness crises.

A BASIC STRATEGY OF BAKER’S PLAN

A basic strategy of Baker’s plan meant the offering of determined and necessary stimuli to debtor countries, for the fulfillment of current duties of debt service. One of the distinctive note of Baker’s plan was a new role of international financial institutions.

   First stage implied the definition of ICF, as one of the main institutions in many respect. Its function, during the period of 1-1,5 years was assistance to the countries for the purpose of stabilization of economic situation. In Baker’s plan world bank was considered as a basic institution in many respects. The plan also implied a review of debt payment conditions, in case of covering a large proportion of debt, after several years, and also continuation of debt payment term. A goal of plan – giving maximum period of time for rooting out reasons of financial conditions of debtor countries. As Baker’s plan did not forsee the balance of additional crediting influence of debtor counties by bank, it generally a ccomplished with insignificant results. credit organizations gave for more less new loans than supposed. This period was used by banks for increasing reserves, in order to reinburse the loss of sovereign countries caused by debt non-payment. It must be said that, in 80s connected with this fact, banks received significant profits. By this time unification process of companies was on the top level. Appeared new loans for buying accommodation and operations of changing debts into bonds. Thus in spite of Baker’s plan, banks were unable to annul the loss, partially caused by debtor countries. Their increase reserves gave opportunities to banking institutes to recognise that, it is less presumable to liquidate the whole debt by debtor countries. It was weakening their assets and can only be used as the potential means of attracting any additional income.

   ARTICLE 3. SINCE 1989. The third article includes, since 1989 up to present period. In 1989, international financial organizations began checking their possibilities of their resources, for the purpose of giving help to debtor countries by means of changing debt documentation, on issued bonds, for debtor countries.

   At the same time, the policy of international financial organizations principally meant significant reduction in total sum of loans or the slice of debt interest. According to a new plan, recommendations for attracting policy of different kinds of investments including direct and portfolio ones were given to debtor countries. Swaps of debt shares were discussed as the realization instruments of above mentioned strategy, although a number of Latin-American countries used other mechanisms for covering debt. e.g. redemption of debt obligations or covering them by providing with goods and services.

   Since the autumn of 1997, the world financial crisis has burst in the region of South Asia. It had an partial influence on banking systems of separate countries as well as all over the world, that was the beginning of a new stage development of above mentioned system.

   So, instability in development of the word financial markets, frequent changes can cause uncontrolledness and complicated nature of their activities, that of course will stipulate economical collapse in different countries one by one.

WHAT IS THE PROCESS OF INTERNATIONAL MOVEMENT OF A CAPITAL

    A process of international movement of a capital, represents the one of intercountry migration of investment for the purpose of their effective investment in foreign countries (for exporter countries), also attraction of necessary material and financial resources from foreign countries in international economics, in the conditions of their qualitative and structural insufficiency (for importer countries).

   Countries of undereconomic development and transition from international markets of a capital, became the importers of significant streams in 1982-1989, only after finishing crisis of the world indebtedness. In the terms of different structure and scales of investment flows, flow of a capital in any case is conditioned by internal as well as external factors

        

Table 1.1

Structure of a capital in the world investment Market.

(USA in milliard dollar %)

Form of movement of a capital

export

import

1981

1990

1995

2005

1981

1990

1995

2005

Direct investments

50,8

10,4%

288,3

25,9%

393,0

23,4%

1190,7

31,5%

83,7

11,4%

200,8

8,0%

326,0

18,9%

1057,3

33,7%

Portfolio investments

72,8

15,0%

183,8

200%

408,0

28,8%

1305,2

34,6%

56,4

10,1%

202,1

23,6%

626,6

34,4%

1560,5

37,4%

Among them, in kind of bonds and other debt obligations

-

154,11

6,7%

292,9

20,7%

560,2

14,9%

-

254,3

22,8%

458,7

20,7%

740,4

17,8%

Assets

-

26,6

2,9%

120,7

8,5%

730,0

19,4%

-

3,8

0,3%

129,2

75%

741,2

17,9%

Other financial instruments and derivators

-

3,1

0,4%

5,6

0,4%

14,4

0,3%

-

11,8

1,1%

38,7

2,2%

78,5

1,9%

Other investments

365,7

79,6%

498,2

54,1%

676,1

47,7%

1280,0

33,9%

440,1

78,5%

649,6

58,4%

770,1

44,7%

1291,0

31,1%

Among them loans

-

243,5

26,5%

330,2

23,3%

212,9

5,6%

-

224,8

20,2%

397,0

23,0%

426,2

10,3%

total

489,3

100%

920,3

100%

1417,9

100%

3779,9

100%

560,2

100%

1112,5

100%

1722,7

100%

4152,7

100%

 

 

 

 

 

 

 

 

 

 

 

   Improved macroeconomic situation as well as carried out structural reforms in importer countries of investments belongs to the first, but to the second – cyclic changes of interest rate in industrially developed countries, also increased interest of banking institutes towards developing markets. Significantly increased a corresponding share of crediting organizations in investing.

   Investors’ increased interest, namely banking institutes conditioned reinforcement process of financial integration and globalization towards the countries of undereconomic development and transition, that made a positive influence on economics of separate countries and global economics totally.

   In 1981-2005, export of a capital increased 7,7 times all around the world. During this period, international export flows of investments increased from 4,6% up to 12% on the world scale. Table 1.1 strict competition on national and world markets of a capital and complication of its forms throughout the world markets, also investment of a capital, different forms of export and import; all these above mentioned caused the growth of investment size on such a large scale.

   A capital can be invested in and attracted from the foreign countries in the following form:

          Entrepreneur’s and borrowed capital

          Capital from private, state or international organizations.

          Money and commodity capital

          Long-term and short-term investment

          Legal and illegal capital

   Selection of this or that form is determined by a concrete goal of analysis. In practice of international analysis, all the above mentioned forms are considered. In order to estimate globally, how a phenomenon of international movement of a capital, influence on importer and exporter countries’ national economic development. Analysis is commonly produced by division of a capital into entrepreneur’s and borrowed ones. Generally, direct and portfolio investments belong to entrepreneur’s capital, although a significant part of this last is in fact borrowed investments (obligations, derivates and so forth). Borrowed capital creates another subgroup – “other investment”

ACTIVE INTERNAL AND EXSTERNAL FACTORS FOR THE EFFECTIVE DEVELOPMENT OF A CAPITAL

   On the financial markets of developing countries, essential motives of investors’ arrival, and correspondingly investors’ increasing quality of this last in the world financial markets- this is searching for economically effective way of investing a capital and diversification of financial markets, but opportunities of  developing countries, placing investments on financial markets, have been intensified since the beginning of 1990. A range of internal and external factors came into motion.

   Internal factors: About the research of international movement of a capital, in literature, it is said that importer countries of a capital, improved the risk characteristics of a backward movement of investments for foreign investments and two methods were used for this. First, a high-priority credit rating of a country, that is reached by restructurization of an external debt in a number of countries. e.g. In Romania – in the middle of 80s, in Bulgaria and Poland in 1990. Moreover, in the countries, overloaded with debt obligations such as: Argentina, Mexico,Venezuela, as well as Nigeria and Philippines, internal economic situation was improved by means of their official participation in international movement of a capital.

   Second: Creating optimal conditions for location of new production, as a result of structural reforms, strengthening confidence towards national macroeconomic politics, just after this, successfully developed stabilization programmes in Eastern European, South-Eastern Asian country associations and in Latin America.

   Because, in European countries, execution of stabilization programmes and structural reforms have been started since 1990-1991, considerable development of their economic conditions has started since 1991-1993. e.g. since the middle of 80s Indonesia, Malaysia and Thailand has been realizing economic programmes, which caused the reduction of budget deficit, devaluation of national currency and reduction of internal crediting rate. At the beginning of 1990, the Philippines followed this example.

   Thus, an openness of national economic towards external trading and reformation of financial system represented stabilization activities in these countries for internal investment market.

   At the end of 1980, in Latin America, Bolivia, Chile and Mexico worked out economic programme against inflation. Argentina, Brazil, Ecuador and Peru began to realize such reforms only at the beginning of 1900. In association-countries of south-eastern Asia, similar economic policy was filled with the programmes, oriented on the liberalization of external trading in goods and services, as well as on the long-term borrowed markets of a capital.

   External factors: Some authors call a drastic role of attracting private flows of a capital in question in national economic politics. It must be said, that a basic factor, that influences on directions of investment flows from the world markets of capital in economic of transitive and economic countries is the economic cycles in developed countries. Since 90s, investors’ interest has sharply been increased towards the markets of developing countries in two ways: It is connected to the reduction of world interest rate. At first, reduction of interest rate in the world markets of a capital coincided with economical collapse in the USA, Japan and in many European countries. It conditioned the fact that, it was possible to get extra profit from the markets of developing countries. On the other hand, just this factor was the reason for increasing creditability. Declined the risk, connected to the origin of default in debtor countries. It is essential to clear out, why most of the flows of investments come from the world markets of a capital. It is possible that mentioned investment flows, by the influence of external factors change their directons on the contrary – that will increase in macroeconomic instability of the market in developing countries.

   Thus, a cyclical phenomenon, is a basic external factor, but after increasing the world interest rate in 1994 and after financial crisis in Mexico, such economic phenomenon as the stable private investment flows are, take place, that makes us suppose that structural changes will make their influence on external factors on the world markets of a capital. Two alternations in financial structures of donor countries, increased demands on a private capital and conditioned the formation of a new international investment possibility.

      

WHAT CAUSED THE DEMANDS ON A PRIVATE CAPITAL?

  

   First and foremost, stiffer competition and increasing expenditures, so characteristic for national economics of industrially developed countries, make companies set their enterprises abroad in order to increase. The profit and a rate of economical growth. The outcome of influence of  this factor is not only activation of export of a capital in the form of direct investments, but alternation of nature and meaning in direct foreign investments themselves, compared with the years of 1970s.

   A major distinctive note of this period was that, the direct foreign investments were mainly directed in the raw materials and extractive industries, also in the fields in return of import. Although, globalization of financial markets, in the size of direct foreign investments gave rize to the growth of the part of this capital, that flowed-out from one country to another by the motive of searching approaches for effective use.

    Second, alternation in financial structure of industrial countries, conditioned in the movement of investment capital from the world financial markets towards the ones of developing countries, as an outcome, institutional investors importance increased. Comparatively high rate of interest on the long-term investments and vast possibilities of risk diversification, became the reason for attraction of institutional institutes, that conditions an intensive investment of a capital in the economics of developing and transitive countries. It must be defined more exactly that, according to the long-term investment, the growth of rate is the result of increasing credit standing level of those countries, which realized the programmes of financial sector and economic stabilization totally at the end of 80s and beginning of 90s.

WHAT IS THE CAUSE OF RISK DIVERSIFICATION?

   Wider possibilities of a risk diversification created as a result of improvement of the markets of issues in developing countries, which offered to investors a range of new instruments and accordingly the risk of liquidity increased more. Moreover, in recipient countries of a capital, globalization of financial markets, that is a result of an increasing competition, regulation of innovations on financial markets and technological changes, increased these possibilities more, that on its side increased the importance of institutional investors. Among them, the most significant are banking institutes, their goal is maximization of in comes and less obedience to the rules. In their development, such a tendency implies that, part of international investments, directed to the markets of developing countries increased. Banks were established, a capital in a number of developing countries; investing in defined regions specializing in separate countries, although it must be taken into account that investments in developed countries represent only 2% from the total liabilities of all the banking institutes in the USA. In Great Britain it goes up about 3-4% but it is not fixed at all in Japan and the rest of Europe. These figures underline the fact of insignificant potentialities in expansion of investment of banking institutes in the markets of developing countries.

   Let’s discuss such intervening analysis. External factors played an important role in selection of investment priorities on the world market of a capital in 1990s, as a result of influence by cyclic and structural factors, during the medium – term period, the importance of structural factor, conditions distinct optimism about investing capital in the economics of developing and transitive countries. At the same time, there is a danger of large. scale flow out of a capital from the country, because of the growth in incoming private capital-flows.

   Reinforcement of  globalization process – is  a basic tendency for the development of the world’s economy.  Growth of international real estate services and changing of a capital, excels the growth of the world industry. According to the data of  International Trade Organization (ITO) in 1990-2000, the world export of goods and services were rising annually 2,6-2,8 times



 



faster, than the world industry. In this period, export of a capital increased much more quickly. Its average annual rate of growth in service and goods exceeded international trade  rate more than two times.

ACTIVE  TENDENCIES  OF  INTERNATIONAL  MOVEMENT  OF  A  CAPITAL.

   Specialists of International Bank, single out a range of common tendencies, that influence on international movement of a capital. Among, the following should be taken into account:

A)    Basic macroeconomic indices of national economics, influence on the rates in long-term investments. Countries with better macroeconomic data; (i.e. High coefficient of investment in Whole Inner Product low level of inflation, real rate stability of national currency) attracted more account of foreign   investments in the viewpoint of percentage approach to WIP. While, countries with negative macroeconomic indices, cannot practically manage to attract foreign investors.

B)     Direct foreign investments are the main constituent components of market investments in developing countries and this condition is partially connected with macroeconomic indices, but is not characterized by only the growth of interest rate on a global-scale.

C)    Portfolio investments are more sensitive towards the level of interest rate. Although, the size of these investments in 1992-1993 increased, in spite of the growth of interest rate on a global-scale

   Having analysed the dynamics and structure of international movement of a capital, it must be said that, major investment exporters and importers in 1981-2000 are still developed countries: In 1981.on their part, total outflow of a capital was 79%. But in 2000-81%. A main donor of foreign capital and recipient of investment capital is still the USA throughout the world. After follows Great Britain and Germany, Canada, Netherlands, Belgium, Luxembourg and Swaziland. Among developing countries, according to this data the Persian Gulf countries are distinguished. (Turkey, India, Argentina, Thailand).

    Among the importers of a foreign capital. Brazil, Argentina, Mexico, India and Turkey take first place. Relatively big recipients of foreign investments, belong to the European countries of transitional economics: Poland, Czech republic, Hungary.

WHAT CHANGES HAPPEN IN THE  STRUCTURE OF INTERNATIONAL MOVEMENT OF A CAPITAL?

    During the last two decades in the structure of international movement of a capital, vital changes took place, namely: In 1981-2000 relations between entrepreneur’s and borrowed capital, changed in favour of the last mentioned one. In the middle 80-90s, on the part of borrowed capital (without portfolio investments) were represented.

   All the incoming and outgoing investments of the world market of a capital. By 2000, this share has been reduced. Although, as the part of portfolio investments belongs to a borrowed capital, share of the last one compiled more than a half of all inflow and outflow capitals.

OBJECTIVE REASONS FOR GROWING PORTFOLIO INVESTMENTS

    In the movement of entrepreneur’s capital, portfolio investments take a leading position. Objective reasons for this sircumstance are the following:

-       Improvement of investment conditions all around the world.

-       Liberalization of politics, towards the international movement of a capital.

-       Strong integration of economics of developing and transitional country markets, in the world market of a capital.

 Bank of developed countries – reinforcement of investors’ investment possibilities imply the fixation of long term period for quick economical growth of fixed unique phenomenon in these countries. Though, in 1997-1998s, the world financial crisis underlined once more the

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size of portfolio investment and subordination of geographical location on existing economic

and political situation in recipient countries; drastic factor – short-term nature of debt obligations, which represent essential part of portfolio investments, and have ability to move firmly together with banking deposits through the countries for the purpose of keeping profit on one side and get super profit of the other hand.

   Main participants of portfolio investment of international markets are the countries with highly developed economics. First is the USA, Germany, Japan, Belgium.

   In 2000, 95% of total portfolio investments, comes to them as porters, but in 1990 it was 90%. Outgoing portfolio investments of transitional and economic countries compiled only 5% and incoming ones – 10%.

   It must also be taken into consideration that direct investments – is main motivational power in the globalization process of the world economics. They deeply influence on the development of national economics, in exporter as well as in importer countries of investments. According to the Data of ICF, outflow of direct investments on a world scale, in 1981-2000  increased 23 times, but inflow – 20 times.

   In 2001, distinct changes in foreign investments took place. (which were stable during the years). They decreased in absolute size-by 40%. Such alternation, from the point western experts view, can be explained not only by aggraviation in crisis situations, in developed countries (first in the USA) but also, by the fact that, the second half of 90s, was characterized as unjustifiable high activity in the field of direct foreign investments. At present, this situation is normalizing, and the process is returning back to the indicators, that took place in the first half of ongoing decade; but it must be mentioned, that typical priority of investment capital, compared with others is that it doesn’t increase the burden of recipient country in economic debts, it is invested for a long-term period and at last, as a rule is invested in a real sector of economics, that consequently expanses and rises production profitability.

   According to the data of World Bank, direct investments have far more macroeconomic importance in Western Europe. (first of all, in small countries) in developing countries of Latin-America and also in the central and eastern countries of Europe.

   For geographical distribution of direct foreign investments is characterized by the same regularities, as for the other types of migration of a capital. Developed countries are exporters as well as importers of these investments. By 80-90s, their share, in the total size of foreign investments outflow compiled 93,4%, but 76,8% in inflow. In 1995 these figures were correspondingly 86,2% and 61,5%. In 2000-91,0% and 79%. In 2001, after distinct reduction of international investment activity, the share of developing countries reduced up to 66% in the world capital inflow of direct investments.

   Generally, it must be remarked, that location and attraction of direct state investments is concentrated within the bounds of developed countries. First of all, these are: the USA, Canada, Great Britain, Germany, France, Belgium, Luxembourg, and Netherlands. Such peculiarity of a capital as “inter-send of a capital” between highly developed countries must also be mentioned.

   Essential part of investments, attracted from developing countries, comes on Latin-American and Caribbean Sea countries (2000-7%), also southern, eastern and south-eastern countries of Asia-11%. In XXI century, characteristic feature of direct foreign investments in importer and developing countries is their less dependence on falling in production in 2001. Here investment activity declined by 6% against 56% of developed countries.

   In the world investment market, participation quality of transitional economics in central and Eastern-European countries is quite small, it is especially about the export of direct investments. In 1981-2000, their share didn’t exceed 0.002% in outflow of the world capital untill 1990,but in 1997 it reached maximum (0.7%). In 1998-2000 this indicator stayed on the level of 0.2-0.3%, their share in the world capital inflow is quite far more.

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 It picked up (4-4.2%) in 1995-1997. In 2000-2%. Significant importers of direct foreign investments are: Czech Republic, Poland, Slovakia and Hungary. The main power for stabilization and expansion of the world investments market are transnational banks and their foreign branches. Liberalization of international investment market working out unique norms for investment  cooperation are basic tendencies of those politics, carried out by national authorities and international organizations for the development of the world investment market.

FORMATION OF INTERNATIONAL INSTITUTES OF GLOBAL STATUS

 

   Formation of international institutes of global status is undivided part of economic relations, connected to international investments. The goals of their activities are: post coordination of participant countries in investment field, introduction of unified methods of working in the world investment markets, control on keeping international judicial norms realizations of joint projects and programmes, creation of new international organizations, reunion and judicial structures, activation of functional, international and regional institutes and also intensification of their roles for regulating international investment market. All the above mentioned are essencial characteristic features in the last decades of XX century. Various forms of investment cooperation are developed in the frames of international integrated unions. (European Union, Naphta, Asean and others). e.g. in the field of international investment, European Union creates institutional principles for the united economic policy: it also established supernational institutes of economic regulation.

   Main changes in the world investment market are conditioned by financial globalization and at a growing rate of scientific-technical development. In 70s of XX century, direct investment are implied as the dominant form of international investment, but in XXI, portfolio investments developed beforehand. It must be said that, reinforcement the importance of financial instruments, helps to attract investments from the investment market to develop new technologies, to raise a banking capital and run the risks qualitatively. International movement of financial instruments is acquiring more and more independent character. So called contract forms of investments are forming, such as: Contracts of services and management, contract of purposeful debt loans contracts of investments of a capital, franchise and leasing contracts and contracts about product distribution. A principal difference among above mentioned operations, is that, conferring the right on property to nonresidents is not in their competence-this is a characteristic feature, towards traditionally discussed direct and portfolio investments. But, contracting form of investments gives right to get profit.

CHANGES IN THE SOURCES OF INVESTMENT FORMS

   Essential changes are happening in the structure of direct investment formation sources in the world market, connected to movements in the field of different kind of priorities and effectiveness, also connected to the reinforcement of interconnections between the markets of securities and credits. Corporative investments together with financial instruments and traditional mechanisms of giving banking credits for financing investment demands are used. Simultaneously, share of credits in international financial organizations is steadily reduced because of strengthening crediting rules. In the conditions of rising financial globalization and transformation of international market structure of corporative bonds take place in the section of basic fund assets. Shares of companies are implied as the main financial instrument. Its share three times exceeds the one of the bonds. International market of state bonds is losing its importance step by step. The cause of this fact is that developed countries has a policy according to which the deficit of state budget is gradually falling into a decline, correspondingly at the

expense of reducing new debts. According to the second reason, the principle of giving priority to investors’ changing at the expense of profit reduction in state securities, besides transacting operations increase in the market of shares.

CHARACTERISTIC TENDENCIES OF INTERNATIONAL INVESTMENT

    A growing rate of the scale in reunion and connection of credit organizations belongs to the characteristic tendencies of international investment, that makes the liberalization of capitals possible, in the conditions of financial globalization .Reunion and connection of credit organizations (Thus disappearance of state banks by foreign investments) should be discussed as one of the important kind of investment operations. In the last decade of XX century, just reunion and connection of financial organizations, but not investments, became the ground for growing investment banking capital to establish new banks, comparatively “ young”, financial market being in the formation process, as a result of reunion and connection of already formed banking institutes, essentially it includes developed countries, post – socialist countries of eastern and central Europe and considerably in a little form – developing countries.

    On its part, this process can be discussed as a diversified formation process of financial banking groups, for which the following functions are characterized: (corporative crediting, investment activities; retail banking services, insurance). All the above mentioned will fill the world investment market in the future.

   Institutional changes, caused by integration of financial institutes, is the main factor that can create investment space and works by unified rules. Integrated model is formed, that provides growth in the demands of investment resources at the expense of activities of diversified financial institutes, which combines the functions of investment and commercial banks, without ones, expansion of new financial instruments.

    A main tendency, for the world investment market development includes strengthening the role of developed countries and weakening the one of developing and transitive countries of economics. Especially for the markets of direct foreign investments. e.g. In the field of investment import, industrially developed countries compile about 73%, about 24% – developing countries and below 3% – central and Eastern-European countries (including  Russia). In the field of investment export 90% comes on developing countries, about 8% – on developed countries, but less than 1% – central and Eastern – European countries (including Russia).

   In last decade, in the world market of a capital, growth in size of direct investments is reached by investors of the world largest three countries – at the expense of the USA, European Union and Japan. By these countries are concentrated 92% of invested investments and 80% – of attracted ones.

   For the development of international investment market, one of the main peculiarities of modern stage is essential growth of European Union, as the centre of the world investment importance. Countries of European Union became the largest donors in the world investment market. 80% of total net-export of foreign investments includes five European countries, which are: Great Britain, Germany, France, Netherlands and Sweden. At the same time, position of European countries intensified in the field of investment attraction from the world markets of a capital, and also in the group position. Thus, growing rates of international investments at the end of XX and beginning of XXI centuries are higher, compared with the rates of industrial production, the world INP and the world trading in goods and services. It conveys the impression, that movement of foreign investments, mostly makes a positive influence on the world economic conditions, but in 2001 “euphoria” of foreign investments finished. In 2001 their inflow compiled 735 milliard $ in the world economics, but outflow – 621 milliard $. In current prices, these indices went down, correspondingly by 51% and 55 %. Such significant declining (almost half) was the first event during the last 90 year-period. The reason of such substantial reduction in direct foreign investments (according to the number of transactions, as well as to their size) is significant reduction in reunion and connection of international financial organizations, that compiles from 70% up to 85% of the world investments. It must be said that, in many foreign specialists opinion, the world economy by 2000 has reached the highest level of development in standard average conditions of investments. Size of investments by this period 5 times exceeded the level, reached five years ago. The specialists of economical development and cooperation organizations consider that, in 1999-2000, so called “ exaggerated investment” took place. Second reason of  significant reduction in investment scales on the world market of a capital is the collapse on the world  markets of a capital, that touched three main centres – The USA, European Union and Japan of the world financial capital. Simultaneously “hesitant” situation on the stock markets in developed countries on its part influence on size reduction of financial resources, invested by banks abroad. These factors had short-term cyclical character, although they became the reason of reducing investment activities in the banks of developed countries.



Jackson

loveleenchawla asked:


 

Abstract:

 

For the last two hundred years, neo-classical economics has recognised only two factors of production: labour and capital. This is now changing. Information and knowledge are replacing capital and energy as the primary wealth-creating assets, just as the latter two replaced land and labor 200 years ago. In addition, technological developments in the 20th century have transformed the majority of wealth-creating work from physically-based to “knowledge-based.” Technology and knowledge are now the key factors of production. With increased mobility of information and the global work force, knowledge and expertise can be transported instantaneously around the world, and any advantage gained by one company can be eliminated by competitive improvements overnight. The only comparative advantage a company will enjoy will be its process of innovation–combining market and technology know-how with the creative talents of knowledge workers to solve a constant stream of competitive problems–and its ability to derive value from information. We are now an information society in a knowledge economy where knowledge management is essential. This page lists and rates Internet resources related to the field of knowledge based economy and knowledge management in the new information society.

Prof. Loveleen Chawla

 

KNOWLEDGE BASED ECONOMY

 

(with special reference to India)

“We are living through a period of profound change and transformation of the shape of society and its underlying economic base … The nature of production, trade, employment and work in the coming decades will be very different from what it is today.”

 

In an agricultural economy land is the key resource. In an industrial economy natural resources, such as coal and iron ore, and labour are the main resources. A knowledge economy is one in which knowledge is the key resource. It is not a new idea that knowledge plays an important role in the economy, nor is it a new fact. All economies, however simple, are based on knowledge about how, for example, to farm, to mine and to build; and this use of knowledge has been increasing since the Industrial Revolution. But the degree of incorporation of knowledge and information into economic activity is now so great that it is inducing quite profound structural and qualitative changes in the operation of the economy and transforming the basis of competitive advantage. The rising knowledge intensity of the world economy and our increasing ability to distribute that knowledge have increased its value to all participants in the economic system. The implications of this are profound, not only for the strategies of firms and for the policies of government but also for the institutions and systems used to regulate economic behaviour.

 

What Is Knowledge Economy?

 

“Capitalism is undergoing an epochal transformation from a mass production system where the principal source of value was human labour to a new era of ‘innovation mediated production’ where the principal component of value creation, productivity and economic growth is knowledge.”

 

Definitions:

 

Defining the knowledge economy is challenging precisely because the commodity it rests on “knowledge” is itself hard to pin down with any precision. Perhaps for this reason there are few definitions that go much beyond the general and hardly any that describe the knowledge economy in ways that might allow it to be measured and quantified.

# The knowledge economy is a vague term that refers either to an economy of knowledge focused on the production and management of knowledge, or a knowledge-based economy. In the second meaning, more frequently used, it refers to the use of knowledge to produce economic benefits.

 

# The knowledge economy is the story of how new technologies have combined with intellectual and knowledge assets – the “intangibles” of research, design, development, creativity, education, brand equity and human capital – to transform our economy.

The Knowledge Economy is emerging from two defining forces: the rise in knowledge intensity of economic activities, and the increasing globalisation of economic affairs.

 

The rise in knowledge intensity is being driven by the combined forces of the information technology revolution and the increasing pace of technological change. Globalisation is being driven by national and international deregulation, and by the IT related communications revolution.

 

However, it is important to note that the term ‘Knowledge Economy’ refers to the overall economic structure that is emerging, not to any one, or combination of these phenomena. Various observers describe today’s global economy as one in transition to a “knowledge economy”, as an extension of “information society”. The transition requires that the rules and practices that determined success in the industrial economy need rewriting in an interconnected, globalised economy where knowledge resources such as know-how, expertise, and intellectual property are more critical than other economic resources such as land, natural resources, or even manpower.

 

According to analysts of the “knowledge economy,” these rules need to be rewritten at the levels of firms and industries in terms of knowledge management and at the level of public policy as knowledge policy or knowledge-related policy.

 

Concepts:

 

A key concept of this sector of economic activity is that knowledge and education (often referred to as “human capital”) can be treated as:

• A business product, as educational and innovative intellectual products and services can be exported for a high value return.

• A productive asset.

 

The initial foundation for the Knowledge Economy was first introduced in 1966 in a book by Peter Drucker. The Effective Executive described the difference between the Manual worker and the knowledge worker. A manual worker works with his hands and produces “stuff”. A knowledge worker works with his or her head not hands, and produces ideas, knowledge, and information.

 

Knowledge Economy Vs. Traditional Economy:

 

It can be argued that the knowledge economy differs from the traditional economy in several key respects:

 

• The economics is not of scarcity, but rather of abundance. Unlike most resources that deplete when used, information and knowledge can be shared, and actually grow through application.

•The effect of location is either diminished, in some economic activities: using appropriate technology and methods, virtual marketplaces and virtual organizations that offer benefits of speed, agility, round the clock operation and global reach can be created . or, on the contrary, reinforced in some other economic fields, by the creation of business clusters around centres of knowledge, such as universities and research centres having reached world-wide excellence.

 

• Laws, barriers and taxes are difficult to apply on solely a national basis. Knowledge and information “leak” to where demand is highest and the barriers are lowest.

 

• Knowledge enhanced products or services can command price premiums over comparable products with low embedded knowledge or knowledge intensity.

 

• Pricing and value depends heavily on context. Thus the same information or knowledge can have vastly different value to different people, or even to the same person at different times.

 

• Knowledge when locked into systems or processes has higher inherent value than when it can “walk out of the door” in people’s heads.

 

• Human capital — competencies — are a key component of value in a knowledge-based company, yet few companies report competency levels in annual reports. In contrast, downsizing is often seen as a positive “cost cutting” measure.

 

• Communication is increasingly being seen as fundamental to knowledge flows. Social structures, cultural context and other factors influencing social relations are therefore of fundamental importance to knowledge economies.

These characteristics require new ideas and approaches from policy makers, managers and knowledge workers.

 

Driving Forces:

 

Commentators suggest that at least three interlocking driving forces are changing the rules of business and national competitiveness:

 

• Globalization — markets and products are more global.

 

• Information/Knowledge Intensity — efficient production relies on information and know-how; over 70 per cent of workers in developed economies are information workers; many factory workers use their heads more than their hands.

 

• Computer networking and Connectivity developments such as the Internet bring the “global village” ever nearer.

 

As concerns the applications of any new technology, it depends how it meets economic demand. It can stay dormant or get a commercial breakthrough.

 

Globalization

 

The other main driver of the emerging knowledge economy is the rapid globalisation of economic activities. While there have been other periods of relative openness in the world economy, the pace and extent of the current phase of globalisation is without precedent.

The global communications revolution has been accompanied by a widespread movement to economic deregulation, including

 

# the reduction of tariff and non-tariff barriers on trade in both goods and services; the floating of currencies and deregulation of financial markets more generally;

 

# the reduction of barriers to foreign direct investment and other international capital flows, and of barriers to technology transfers; and

 

# the deregulation of product markets in many countries, particularly in terms of the reduction in the power of national monopolies in areas such as telecommunications, air transport and the finance and insurance industries.

Together these changes have led to rapid globalisation. As a result, goods and services can be developed, bought, sold, and in many cases even delivered over electronic networks.

 

Increasing knowledge intensity

 

The last twenty years have seen an explosion in the application of computing and communications technologies in all areas of business and community life. This explosion has been driven by sharp falls in the cost of computing and communications per unit of performance, and by the rapid development of applications relevant to the needs of users. Digitalization, open systems standards, and the development software and supporting technologies for the application of new computing and communications systems – including scanning and imaging technologies, memory and storage technologies, display systems and copying technologies – are now helping users realise the potential of the IT revolution. It is in the Internet that these technologies come together, and it is the Internet phenomenon that exemplifies the IT revolution. Over the first decade of its development the Internet remained a specialist research network. By 1989 there were 159,000 Internet hosts worldwide. Now, just 10 years later, there are more than 43 million.

 

In economic terms, the central feature of the IT revolution is the ability to manipulate, store and transmit large quantities of information at very low cost. An equally important feature of these technologies is their pervasiveness. While earlier episodes of technical change have centered on particular products or industrial sectors, information technology is generic. It impacts on every element of the economy, on both goods and services; and on every element of the business chain, from research and development to production, marketing and distribution.

 

Because the marginal cost of manipulating, storing and transmitting information is virtually zero, the application of knowledge to all aspects of the economy is being greatly facilitated, and the knowledge intensity of economic activities greatly increased. This increasing knowledge intensity involves both the increasing knowledge intensity of individual goods and services, and the growing importance of those goods and services in the economy.

 

Computer Networking and Connectivity

 

It is virtually impossible to separate technology from the act of living in today¹s world. We are all connected to our work, to our product and service providers, and to each other in myriad ways that could never have been predicted just ten years ago. Out of this vast degree of interconnectivity spring networks – and nodes of contact within networks – that add momentum to the pace of still more technological opportunities and developments. It is an undeniable fact that ICTs play a very important role in the development of every nation these days. This is because growth is induced by the flow of information and this realization has led most economies into knowledge based ones. Developing countries have realized this and are rigorously pursuing the use of ICTs as a platform for socio-economic development.

 

Electronic commerce (e-commerce) is a rapidly growing segment of the economy, which is expected to increase yet more rapidly over the next few years. Current internet commercial transactions are estimated at hundreds of millions and are projected for billions within the decade. The growth of net transacted revenues will be energized with Visa and MasterCard’s release of secure software standards for their card members’ internet transactions, and the acceptance of standards for micropricing. All in all, it is reasonable to project that, in a decade’s time, the vast majority of economic transactions will involve a significant electronic component. Business is experiencing a significant transition. This transition is based on the fact that we are now in a networked environment. ICT can bring business transformation, changing work environments and global economy. Advent of the “new economy”, embodied by the expansion of the internet, would be the signal of the end of geography and space. Distances are reportedly abolished as markets are from now on at a click away.

 

Growing Interest

 

Various management writers have for several years highlighted the role of knowledge or intellectual capital in business. The value of high-tech companies such as software and biotechnology companies, is not in physical assets as measured by accountants, but in their intangibles such as knowledge and patents. The last few years have a growing recognition by accounting bodies and international agencies that knowledge is a crucial factor of production. For example, the OECD has groups investigating ‘human capital’ and also the role of knowledge in international competitiveness.

 

Policy Implications

 

The evolving knowledge economy has important implications for policy makers of local, regional and national government as well as international agencies and institutions e.g.:

• Traditional measures of economic success must be supplemented by new ones

• Economic Development policy should focus not on ‘jobs created’ but rather on infrastructure for sustainable ‘knowledge enhancement’ that acts as a magnet for knowledge-based companies.

• Develop regulation and taxation for information and knowledge trading at international level, looking to future knowledge-based industries rather than traditional industries.

• Stimulate market development through new forms of collaboration.

 

Issues And Challenges:

 

The main challenges facing policy makers and business leaders are the following:

• It is difficult to ‘go it alone’. Stakeholders, especially employees and business partners must share similar views for your own initiatives to succeed

• alone recognition and reward systems usually do not sufficiently recognise recognizee contributions. They are linked to performance measures of the traditional economy.

• Measures of return on investment are done using traditional accounting methods, thus investments in knowledge enhancing activities need strong advocates at senior levels.

 

Emergence Of The Knowledge

 

The emergence of the knowledge economy can be characterised in terms of the increasing role of knowledge as a factor of production and its impact on skills, learning, organisation and innovation.

• There is an enormous increase in the codification of knowledge, which together with networks and the digitalisation of information, is leading to its increasing commodification.

• Increasing codification of knowledge is leading to a shift in the balance of the stock of knowledge – leading to a relative shortage of tacit knowledge.

 

• Codification is promoting a shift in the organisation and structure of production.

 

• Information and communication technologies increasingly favour the diffusion of information over re-invention, reducing the investment required for a given quantum of knowledge.

 

• The increasing rate of accumulation of knowledge stocks is positive for economic growth (raising the speed limit to growth). Knowledge is not necessarily exhausted in consumption.

 

• Codification is producing a convergence, bridging different areas of competence, reducing knowledge dispersion, and increasing the speed of turnover of the stock of knowledge.

 

• The innovation system and its ‘knowledge distribution power’ are critically important.

 

• The increased rate of codification and collection of information are leading to a shift in focus towards tacit (‘handling’) skills.

 

• Learning is increasingly central for both people and organisations.

 

• Learning involves both education and learning-by-doing, learning-by-using and learning-by-interacting.

 

• Learning organisations are increasingly networked organisations.

 

• Initiative, creativity, problem solving and openness to change are increasingly important skills.

 

• The transition to a knowledge-based system may make market failure systemic.

 

• A knowledge-based economy is so fundamentally different from the resource based system of the last century that conventional economic understanding must be re-examined.

 

What’s New About The New Economy?

 

“In the 21st century, comparative advantage will become much less a function of natural resource endowments and capital-labour ratios and much more a function of technology and skills. Mother nature and history will play a much smaller role, while human ingenuity will play a much bigger role.”

 

What makes the emergence of the knowledge economy important is that it is, in some significant respects, different from the industrial economy we have known for most of the last 200 years. Those differences include the following:

 

Information revolution

 

The IT revolution has intensified the move towards knowledge codification, and increased the share of codified knowledge in the knowledge stock of advanced economies. All knowledge that can be codified and reduced to information can now be transmitted around the world at relatively little cost. Hence, knowledge is acquiring more of the properties of a commodity. Market transactions are facilitated by codification, and the diffusion of knowledge is accelerated. Codification is also reducing the importance of additional, duplicative investments in acquiring knowledge. It is creating bridges between fields and areas of competence and reducing the ‘dispersion’ of knowledge. These developments promise an acceleration of the rate of growth of stocks of accessible knowledge, with positive implications for economic growth.

 

Knowledge, skills and learning

 

Information and communication technologies have greatly reduced the cost and increased the capacity of organisations to codify knowledge, process and communicate information. In doing so they have radically altered the ‘balance’ between codified and tacit knowledge in the overall stock of knowledge. In essence, creating a shortage of tacit knowledge. As access to information becomes easier and less expensive, the skills and competencies relating to the selection and efficient use of information become more crucial, and tacit knowledge in the form of the skills needed to handle codified knowledge becomes more important than ever.

 

Information and communication technology investments are complementary with investment in human resources and skills. The skills required of humans will increasingly be those that are complementary with information and communication technology; not those that are substitutes. Whereas machines replaced labour in the industrial era, information technology will be the locus of codified knowledge in the knowledge economy, and work in the knowledge economy will increasingly demand uniquely human (tacit) skills – such as conceptual and inter-personal management and communication skills.

 

Innovation and knowledge networks

 

The knowledge economy increasingly relies on the diffusion and use of knowledge, as well as its creation. Hence the success of enterprises, and of national economies as a whole, will become more reliant upon their effectiveness in gathering, absorbing and utilising knowledge, as well as in its creation.

A knowledge economy is, in effect, a hierarchy of networks, driven by the acceleration of the rate of change and the rate of learning, where the opportunity and capability to get access to and join knowledge-intensive and learning-intensive relations determines the socio-economic position of individuals and firms.13 Firms must become learning organisations, continuously adapting management, organisation and skills to accommodate new technologies and grasp new opportunities. They will be increasingly joined in networks, where interactive learning involving creators, producers and users in

experimentation and exchange of information drives innovation.

 

Learning organizations and innovation systems

 

In a knowledge economy, firms search for linkages to promote inter-firm interactive learning, and for outside partners and networks to provide complementary assets. These relationships help firms spread the costs and risks associated with innovation, gain access to new research results, acquire key technological components, and share assets in manufacturing, marketing and distribution. As they develop new products and processes, firms determine which activities they will undertake individually, which in collaboration with other firms, which in collaboration with universities or research institutions, and which with the support of government. Innovation is thus the result of numerous interactions between actors and institutions, which together form an innovation system.

 

Those innovation systems consist of the flows and relationships, which exist among industry, government and academia in the development of science and technology. And the interactions within these systems influence the innovative performance of firms and ultimately of the economy. The ‘knowledge distribution power’ of the system, or its capability to ensure timely access by innovators to relevant stocks of knowledge, is therefore a major determinant of prosperity.

Global competition and production.

Strategy and location.

 

India As A Knowledge Economy: Aspirations Versus Reality

 

The Indian vision of a knowledge-based economy will be realised only when it is based on the foundation of a robust industrial economy. To be truly beneficial, the rain of IT must fall at the right place, in the right quantity, at the right time and for the right purpose.

 

THE Indian software industry has compiled an impressive track record over the past decade. Entrepreneurs, bureaucrats and politicians are now advancing views about how India can transform itself into a knowledge-based economy by riding the information technology (IT) bandwagon. Isolated instances of villagers using e-mail are cited as examples of such transformation. Likewise, e-governance is being projected as the way of the future.

 

There is no dearth of fascinating stories about IT-enabled changes. But, there is little discussion about whether such changes are sustainable and effective when other areas of the economy continue to lag. For example, 79 per cent of India’s population lives in villages with limited basic infrastructure. Over 60 per cent of the population is considered literate, but with literacy being defined as the ability to read and write simple words in any language, acquired with or without formal schooling. This criterion is so basic, that it is almost irrelevant in the context of a knowledge economy. Yet, Central and State governments have projected IT as a vehicle for social and economic transformation. Are we putting the cart before the horse here? Even if the focus on IT is justifiable, how must IT policy be designed so that the nation is benefited in a balanced way?

 

In this commentary, we discuss the implications of India’s intensive focus on the IT sector. We argue that India should aggressively pursue manufacturing- and agriculture-based industries to build a robust industrial economy that can be made more efficient with IT. IT projects can certainly be pursued within the private sector. However, government policy should not be heavily skewed in favour of the IT industry when its benefits to society are unclear and when its role within the broader framework of national development has not been adequately articulated. Further, policy-makers should moderate their obsession with IT as a panacea for India’s socio-economic problems.

 

India As A Knowledge Economy:

 

The value of IT depends greatly on the existing level of economic development. IT can make existing assets and processes more effective and efficient, but cannot compensate for the lack of a basic infrastructure. What is appropriate for a developed economy is not necessarily appropriate for India, where basic elements of infrastructure including quality education, healthcare, electricity and drinking water remain in short supply.

 

The impact of IT is best understood when the differences between industrial and knowledge-intensive ventures are recognised. Industrial growth derives from investments in large-scale infrastructure (such as railways, roadways, power grids and dams). Such infrastructure supports the growth of physical-asset intensive industries (such as the steel and transportation industries) that create and move physical entities (such as goods, water and people). These ventures employ numerous workers with limited education and skills, and can uplift large sections of society.

 

In contrast, ventures in the knowledge economy usually involve the production of knowledge-intensive goods (like software), and the large-scale capture, movement and utilization of information using sophisticated network infrastructure (such as computers, cable, fibre and routers). Beyond the physical labour required for initial construction, building and maintaining such infrastructure requires specialized knowledge.

 

Despite the hype of the “new economy”, the fact is that economic development is cumulative. The industrial economy made agriculture more productive. The productivity of agricultural labour skyrocketed with the use of industrial and biological innovations including tractors, irrigation systems, fertilizers, pesticides and genetically engineered seeds. Historically, industrial innovation in developed economies has created great wealth and improved living standards across societal divides. This progress has set them up in an ideal position to create and exploit knowledge as they transform into knowledge-based economies. Crucially, the greatest source of productivity and growth attributed to the knowledge economy derives not from the knowledge economy itself, but from its effects on the industrial economy. For example, IT can enable supply chains and factories to work more efficiently.

 

The “leapfrogging” argument, whereby India skips heavy infrastructure building and transforms directly into a knowledge economy, is therefore suspect. Proponents of leapfrogging describe how isolated villages without conventional telephones have directly adopted cellular phones. The example provides excellent symbolism. However, the underlying principle is not scalable to the level of the national economy where many complex sub-systems work together. Consider the transportation sub-system. The laws of physics do not allow IT to substitute the physical movement of goods by a “virtual” movement. A lightning-fast information network will not in itself help achieve faster and cheaper transport. Better roadways and railways will.

 

IT, job growth and government policy

 

Indian IT firms have focussed on developing and delivering IT services to advanced economies. Even if India became the world’s software factory and the most optimistic projections of IT-related jobs (including jobs in call centres and design centres) were upheld, this industry will employ at most a few million people. In a nation with over a billion people, this constitutes but a dent in the employment statistics.

 

Further, a social planner should be concerned not just with the creation of wealth, but also with its distribution across social divides. The IT industry holds limited potential for wealth to trickle down to the poorer sections of society. Unlike a steel plant, IT engenders few opportunities for the uneducated. Any transfer of wealth from the IT sector (for example, by taxing the IT sector to fund social spending) would be achieved through the heavy hand of government.. In fact, the rapid growth of IT will likely lead to a digital divide in the short term, where the rich and educated are empowered and enriched by IT and the poor are oblivious to its impact.

Before embracing IT, Indian policy planners must carefully evaluate whether investments in other areas would yield higher, and more equitable, returns. For example, consider the jute industry.

 

The country needs to be particularly careful not to give short shrift to the manufacturing sector. China is not known for its strengths in IT, although it now has some presence in the area. But, what China has accomplished in terms of its core industrial base is striking. Foreign direct investment (FDI) in China was of the order of $40 billion in 2000 despite all the noise about alleged labour and human rights abuses. Chinese exports exceeded $200 billion in 2000, with the United States alone accounting for $100 billion of these exports. In fact, the value of “footwear” exported annually by China to the U.S. (worth about $9.2 billion) itself compares with or even exceeds the total value of India’s annual IT exports.

 

Why are these numbers relevant? Exporting footwear creates millions of jobs for citizens who lack sophisticated skills. According to some reports, a total of 34 million export-related jobs have been created in China, with exports to the U.S. alone accounting for over 20 million jobs in the last decade. These jobs have improved living standards for a substantial fraction of Chinese society. There is much we need to learn from China about how the manufacturing sector can deliver robust and equitable economic growth. Taiwan, Malaysia and South Korea have also flourished using similar approaches.

 

In contrast with manufacturing, the direct benefits to IT (such as employment in IT jobs) are likely to flow to the few who already have the benefits of education. The trickle-down effects of IT (such as cleaning and maintenance staff for IT firms) are likely to be modest or non-existent outside the large cities. It is also time to discard the notion that the manufacturing sector is inherently less appealing because it may involve some physical labour.

 

In the more advanced economies, a skilled factory floor worker is frequently paid more than a call-centre employee. Empowered with technology, the factory worker can add value at a remarkable rate. In India, the reverse often holds. Mundane call-centre jobs, often outsourced from more developed economies, absorb well-educated, English-speaking workers whose abilities could be employed much more productively elsewhere.

 

The actions of governments in India tend to be biased in favour of the IT sector.. The government needs a more balanced policy, one that ensures that the core industrial sector is not ignored in the rush toward IT.

 

IT and education

 

IT is fashionable to say that India’s population constitutes its greatest asset. This viewpoint is misleading. People are assets only when they participate meaningfully in the cycle of value creation and consumption by exercising buying power, or creating products and services of value, or by creating and harnessing knowledge. A large fraction of India’s population does not meet, or even come close to, this asset standard. To transform such a situation, a renewed focus is required on the two pillars that have supported the growth of every successful economy – a strong infrastructure core and widespread access to education. Now to discuss the IT-education interface.

 

Selling parts of used computers on a Chennai street.

 

Distance learning and e-learning are already being flaunted in some quarters as solutions to India’s education challenges. The argument proffered is that IT can enable the cheap and widespread delivery of education. This reasoning ignores the key challenge – how can the children of the poor and the uneducated be provided with the incentives to come to school, stay in school, and progress to higher institutions of learning? The answer lies in understanding physiology, psychology and economics, rather than in implementing technology. For all its drawbacks and implementation problems, the mid-day meal programme launched by the late Chief Minister M.G. Ramachandran in Tamil Nadu addressed this challenge head on. The programme recognised a simple, but fundamental, fact – the brain cannot feed when the stomach itself is unfed. It provided parents with the incentive to send their children to schools, rather than to the fields. For the children to whom the benefits of education seemed like a distant, hazy mirage, it provided an immediate, tangible reason to stay in school.

 

There is little reason to believe that IT-based learning will advance meaningfully the cause of Indian education. Problems that are enmeshed in the social and economic fabric of Indian society need to be addressed primarily with solutions that are of a social and economic nature. Throwing technology at these problems will not make them go away.

 

In addition, creating the infrastructure and content to support effective e-learning is very expensive. A rush into e-learning at this stage will only lead to squandered resources.

 

IT and culture

 

A Knowledge Economy is characterised by a culture of innovation. For such a culture to take root, innovation must be rewarded and intellectual property must be protected.

 

A culture that truly enhances innovation supports the view that to try hard and fail is perfectly fine. Yet, the Indian psyche has historically been averse to blessing the risky venture. This attitude transcends into the corporate arena. Consider how static the Indian automobile industry was for three decades before the refreshing winds of competition brought about rapid change. Competition breeds innovation.

 

While one side of the cultural coin pertains to the incentives for innovation, the flip side pertains to its protection. Ideas, unlike property, cannot be protected by building a fence around them. Intellectual property protection is not a purely economic issue; it also has important cultural dimensions. The economic angle can be addressed with stronger patent laws and punitive procedures. However, the cultural angle will decide whether such protection can be enforced meaningfully. Addressing the cultural angle is a challenge.

 

The road to technology

 

A society that is deeply divided by social and economic fissures must think carefully about how it achieves economic and technological advance. The path, in some ways, is more important than the outcome itself.

 

In the Indian context, particular attention needs to be paid to when, where, and in what form IT and other technological advances are encouraged. There are, indeed, many low-hanging fruits to be harvested. For example, a recent article in The New York Times described how a fisherman working off the coasts of Kerala used a cellphone on the seas to obtain information about spot market prices for fish at Kochi and Kollam. The fisherman netted the equivalent of an additional $1,000 in annual income merely by deciding to deliver his catch to the more remunerative market each time his boat came in. This striking example of how simple information flows can enhance market efficiency can be replicated in many ways, and in many markets. However, the stakes are quite different when it comes to the formulation of a national IT policy. Any national policy requires some trade-offs between the benefits to industrial sectors, regions and classes of people. In formulating a national IT policy, the quest for superior technology must be moderated by an understanding of its implications at the social level – what might be good for a private company or an entrepreneur may not always be good for society and vice-versa

 

Successful technology adoption will move in measured steps, at a pace and in a direction that are in harmony with changes in the socio-economic fabric. The role of the government in ensuring such harmony should not be underestimated. This is especially true in India where the government remains responsible for a significant fraction of the economic output, and where it is actively reshaping rules and regulations as the country integrates into the global economy.

 

Information technology can change the way a society communicates, collaborates, lives, works and plays. The growth of the IT sector in India symbolises the potential of Indian industry to perform at world-class standards. This success demonstrates much of what can go right when the spirit of human enterprise is given free rein.

 

However, the success of IT at the corporate level in India cannot solve its myriad economic and social challenges. Just as copious rainfall can lead to dramatic floods, an obsession with IT and the knowledge economy is not useful. To be truly beneficial, the rain of IT must fall at the right place in the right quantity, at the right time and for the right purpose. Neither does the aggressive pursuit of IT represent the sole, or even an obvious, pathway to a first class economy despite the glowing success of high-profile IT companies.

 

Conclusion:

 

For the last two hundred years, neo-classical economics has recognised only two factors of production: labour and capital. This is now changing. Information and knowledge are replacing capital and energy as the primary wealth-creating assets, just as the latter two replaced land and labor 200 years ago. In addition, technological developments in the 20th century have transformed the majority of wealth-creating work from physically-based to “knowledge-based.” Technology and knowledge are now the key factors of production. With increased mobility of information and the global work force, knowledge and expertise can be transported instantaneously around the world, and any advantage gained by one company can be eliminated by competitive improvements overnight. The only comparative advantage a company will enjoy will be its process of innovation–combining market and technology know-how with the creative talents of knowledge workers to solve a constant stream of competitive problems–and its ability to derive value from information. We are now an information society in a knowledge economy where knowledge management is essential. This page lists and rates Internet resources related to the field of knowledge based economy and knowledge management in the new information society.







Tod

Payal Jindal asked:


The LG GC900 VIEWTY II which was launched in April 2009 has made a large breakthrough to mobile addicts internationally. Its super sonic adaptable nature has made it more saleable to the market since it hypnotizes different mass sectors globally. This 3G phone made way to a new generation type of phones. The LG GC900 VIEWTY II is made with a glossy and specialized casing that comes in sophisticated black and definite modest silver. It also has a unique trouchscreen that gave way to easy accessibility features.

Some of the features include:



A TFT capacitive touchscreen matrix that can support up to 16 million colours for a high quality resolution. It also has a multi-touch input function and an advanced accelerometer sensor for auto-rotate, in landscape and portrait layout options



It also contains a music player that supports, mp3, AAC, WMA formats and an absolutely one of a kind speakerphone powered by Dolby, for an enhanced high quality music surround experience



The LG GC900 VIEWTY II has a large screen of 3.0 inches with a maximum of 800 x 480 pixels which allows users to manoeuvre and access different screens at one time viewpoint



It has also an incorporated internal memory of 1.5 GB allowing storage of up to 1000 contact entries and 40 dialled, 40 missed and 40 received calls, plus a card slot using a microSD as an external memory that is expandable to up to 16 GB.



This handset has an integrated primary camera with 8 megapixels, at 3264 x 2488 pixels resolution, with an auto/manual focus and a high quality LED flash, that includes a futuristic, super-intelligent features such as geo-tagging, image stabilization for motion images, multi-face detection up to 3, smile detection a one-of-a-kind beauty shot and a ISO 1600



This also has a secondary camera for 3G purposes that allows a maximum HSDPA of up to 7.2 Mbps speed for faster buffs. 



This smart phone has a class 12 edge and can cater to 32-48 kbps speed for a GPRS data with A-GPS support for Google maps 



This phone has a built-in video recorder with slo-mo video recording optional features and a maximum QVGA time-lapse that can handle up to 720×480@30fps, VGA@30fps 



For recreational purposes, this phone is inclusive of 5 pre-customized games that comprise motion-based games, that can be changeable to user’s preference 



The LG GC900 VIEWTY II comes with a WAP 2.0 Browser, a Bluetooth 2.0 and a Wi-Fi 802.11 b/g for faster connectivity and accessibility to internet networks and web



 



Earlene

Kamil Kanji asked:


Abstract

This paper is concerned with the impacts of strict patents in the pharmaceutical industry, focusing on the Trade Related Aspects of Intellectual Property Rights (TRIPs) Agreement. It discusses the historical and current policy context, to better understand how strict patents affect the availability of essential drugs in developing countries.

The research shows that the pharmaceutical industry prioritises profit above health. Strict patents reduce the availability and affordability of new essential drugs in developing countries, and thereby have a negative impact on the health of the world’s poor. Larger pharmaceutical companies benefit more than smaller companies because they have a monopoly in the industry. They invest more in research and development and, linked to economies of scale, are better positioned to exploit markets for new drugs.

The example of India highlights the importance of generic production and essential drugs in developing countries. It shows that while TRIPs promotes economic growth of the industry and encourages investment in research and development of new drugs, it increases the prices of new essential drugs, thereby isolating benefits from the majority poor populations in developing countries.

The paper suggests that based on historical and current trade policy, developed countries have an ethical obligation to allow poorer countries to develop infrastructure for their pharmaceutical industry, a responsibility not being fulfilled. It suggests TRIPs be revised under a more ethical framework. This includes increasing public funding of research and development, shortening the length of patents and allowing developing countries to generically produce essential drugs.

The paper highlights the interconnectedness of social, economic and political factors that could increase the availability of essential drugs in developing countries. It highlights the importance of better understanding the issues surrounding strict patents, and why the scientific community is critical to this process, in terms raising awareness and collaborating with independent organisations and concerned citizens to ultimately press governments for change at the national and international level.

Table of Contents

1. Introduction

1.1 What are Patent Laws?

1.2 What is TRIPs?

1.3 Focus and Structure of the Paper

2. Pharmaceutical Industry for Profit or for Improving Health?

2.1 Scale of Profits

2.2 Investment Priorities

2.3 Diffusion



3. Essential Drugs and Generic Production

4. Impacts of TRIPs

4.1 Main advantages

4.2 Main disadvantages

4.3 The Doha Agreement and Compulsory Licensing

5. Conclusions

6. References

1. INTRODUCTION

‘As the ancient scourge of polio was rolled back by his vaccine 50 years ago, Jonas Salk, the inventor of the polio vaccine was asked why he never took a patent out on the medicine, a patent that would have made him wildly rich. “There is no patent,” he replied … “Could you patent the sun?”’ (Salon.com magazine 2001).

This paper explores the impacts of pharmaceutical patents on drug availability in the third world, focusing on the impacts of the Trade Related Aspects of Intellectual Property Rights (TRIPs) Agreement. It highlights the value of essential drugs and generic production in developing countries, using India as a case study. It also explores alternatives to TRIPs and the role of the scientific community.

1.1 What are patent laws?

A patent can be defined as ‘a monopoly right granted to person who has invented a new and useful article, an improvement of an existing article or a new process of making an article’. It consists of an exclusive right to manufacture the new invented article, or manufacture an article according to the invented process for a limited period. During the term of patent, the owner of the patent, i.e. the patentee can prevent any other person from using the potential invention .

Figure 1: Brief History of Patent Law

The timeline below illustrates the brief recent history of patents in the world .

1880-1882

Patent statutes introduced in most European countries

1883

Paris Convention for the Protection of Industrial Property – cornerstone of the modern international patent system.

1947 International Patent Institute (IIB) established at the Hague

1970

Patent Co-operation Treaty signed in Washington, D.C.

1978

International Patent Institute integrated into the European Patent Office (EPO)

1979

Bayh-Dole Act passed-granted permission to U.S. universities to license and profit from federally sponsored research*

1980

International Patent Documentation Centre (INPADOC) integrated into the EPO

In the pharmaceutical industry patents have a straightforward objective. They provide a strong incentive for companies to invest in the research and development of new drugs, knowing that they will be able to recuperate costs and, subsequently, profit from the new drug. However, patents enable parent companies to control the price and availability of new drugs. There is no competition from other companies to produce the drug, which would usually lower the price. Thus, increasing the length of patents can reduce the availability of new essential new drugs in developing countries, with knock on health problems.

Essential drugs can be broadly defined as those that satisfy the health care needs of the majority of the population. They should, therefore, ideally be available at all times in adequate amounts; in the appropriate dosage forms; at reasonable (affordable) price; and, meeting the criteria of quality, safety and efficacy (New Strait Times 1998).

Under the term of a patent, drugs, essential or non-essential, can only be produced by the parent company. This means that there is no competition from other companies to produce the drug, and the parent company can charge a high price for the drug, effectively making the drug unavailable for poorer people.

New drugs tend to be more available to developed countries, because people are more affluent and can afford higher prices. For this reason, pharmaceutical companies tend to market their drugs at developed countries. Overall, developed countries benefit more from new technology and advances in science because their governments, companies, and people can afford to buy into the technology.

The World Trade Organisation’s (WTO) Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, which extends the length of patents, enables companies to significantly increase their profits and increase the technology gap between developed and developing countries.

1.2 What is TRIPs?

The Trade Related Aspects of Intellectual Property Rights (TRIPs) was added to the General Agreement on Tariffs and Trade (GATT) at the end of the Uruguay Round of trade negotiations in 1994. It came into full force in January 2005, and its inclusion by the World Trade Organisation (WTO) was the ‘culmination of a program of intense lobbying’ by the United States, supported by the EU, Japan and other developed countries .

The United States strategy of linking trade policy to intellectual property standards can be traced to senior management at Pfizer (a large United States pharmaceutical firm) in the early 1980s. Pfizer mobilised corporations and made maximising intellectual property privileges the number one priority of United States trade policy .

According to the WTO, ‘TRIPs is an attempt to strike a balance between the long term social objective of providing incentives for future inventions and creation, and the short term objective of allowing people to use existing inventions and creations’ .

The following requirements of TRIPs all have a bearing on the pharmaceutical use of patents .

? Copyright must be granted automatically, and not based upon any “formality”, such as registrations or systems of renewal.

? National exceptions to copyright (such as “fair use” in the United States) must be tightly constrained.

? Patents must be granted in all “fields of technology” (regardless of whether it is in the public interest to do so).

? Exceptions to patent law must be limited almost as strictly as those to copyright law. In each state, intellectual property laws may not offer any benefits to local citizens which are not available to citizens of other TRIPs signatories (this is called “national treatment”). TRIPs also has a most favoured nation clause.

? Patents in the pharmaceutical industry will apply for 20 years, instead of 10 to 15 years.

Some developing countries began to grant their own patent protection in the late 1980s, but TRIPs is a compulsory requirement for any country who wants to be a member of the World Trade Centre, and with that memberchip access to international markets and trade relationships. Countries which do not adopt TRIPs can be disciplined through the WTO’s dispute settlement mechanism, which is capable of authorising trade sanctions against dissident states . Therefore, the economic and poltical threats, which could cripple a poor economy, effectively forced developing countries to ratify the agreement.

The TRIPs agreement makes it easier to obtain and enforce patents. It increases the length of pharmaceutical patents, from 10 to 15 years to 20 years, which encourages companies to invest more in research and development and promotes economic growth. However, it favours developed countries, which have the capacity to enforce their rights globally, and create more exclusive trade options under the Intellectual Property Rights (IPRs). Developed countries have more pharmaceutical infrastructure and companies that are used to using patents to make profit.

1.3 Focus and structure of this paper

Chapter 1 introduced the main contentions of using strict patents in the pharmaceutical industry. It explained how patents work, and the main changes that TRIPs will make to the pharmaceutical industry.

Chapter 2 shows the monopoly of a handful of large pharmaceutical companies in the pharmaceutical industry. It provides a sense of the scale of the profits made by these companies, contrasting the investment priorities and types of drugs produced with those that are needed in developing countries. The Chapter debates whether the industry is for profit or health, briefly highlighting how companies make false claims through advertising in developing countries.

Chapter 3 introduces the idea of essential drugs and generic production, exploring the benefits with a case study of India. Chapter 4 shows how TRIPs will restrict generic production of essential drugs, and the impacts this will have on the majority poor populations in developing countries. The conclusion, Chapter 5, suggests how TRIPs could be revised under a more ethical framework, exploring the historical and current drug policy context, with particular emphasis on the role of scientists.

2. PHARMACEUTICAL INDUSTRY FOR PROFIT OR HEALTH?

In an attempt to understand how pharmaceutical companies control the availability of essential drugs, and use patents to make substantial profits, this chapter debates whether the pharmaceutical industry is for profit or health. It looks at the scale of profits made by the pharmaceutical industry and their investment priorities, also challenging whether ‘diffusion’ of biotechnology works to provide essential drugs to developing countries.

2.1 Scale of profits

There is a very familiar trend in the international pharmaceutical industry. A handful of multinational companies, originating from developed countries, have a great deal of economic power, which gives them control over drug availability and health. They also lobby governments to make trade policy which suits their profit making agenda. In 1996 the first ten multinational pharmaceutical companies accounted for approximately 36 per cent of the world pharmaceutical sales of US$ 251 billion .

Table 1: The World’s Top Ten Pharmaceutical Companies in 2003

Company Pharma Profit ($million) Pharma Sales ($ million) Pharma Operational Profit Margin

Pfizer 12,920.0 28,288.0 45.7%

Merck & Co. 10,213.6 21,631.0 47.2%

GlaxoSmithKline 7,598.2 26,979.0 28.2%

Johnson & Johnson 5,787.0 17,151.0 33.7%

AstraZeneca 4,006.0 17,841.0 22.5%

Novartis 3,857.3 13,497.4 28.6%

Wyeth 3,505.5 12,386.6 28.3%

Aventis 2,969.6 15,705.4 18.9%

Abbott 2,739.0 9,304.0 29.4%

Takeda 2,446.6 6,838.3 35.8%

Group Subtotal 56,042.9 169,621.8

Average 31.8%

Source: Adapted from Scrip Report 2003

The pharmaceutical sector racks up the largest legal profits of any industry, with an average 18.6 % return on revenues in 2001 (Resnik 2001).

However, Table 1 shows that the top ten companies achieved a much higher average profit margin of 31.8% in 2003. Thy have a monopoly over the industry. Linked to economies of scale, larger companies can exploit larger market *********** to increase their profits. For example, Pfizer and Merck & CO, two out of the top three pharmaceutical companies in 2003 according to gross sales, had a profit margin of 45.7% and 47.2% respectively. This was much higher than the average profit margin of the top ten companies (31.8%), which illustrates the relationship between economic power and power of market exploitation.

The pharmacetical industry justifies their high profits with the argument that a great deal of time and money is invested in the research and development of new drugs. In 1998, developed countries spent US$520 billion on research and development, more than the total economic output of the world’s poorest 30 countries. In 2003, it was estimated that the average cost of producing a new chemical compound is around US$ 200 million . Thus, the industry is keen to protect their investments and subsequently reward their efforts by making a great deal of profit. However, there are ethical issues as to whether the scale of the profit can be justified, given the healthcare problems that exist in developing countries resulting from the unavailability of essential drugs.

Large pharmaceutical companies maintain their monopoly by investing great sums in legalities to lobby governments into protecting the industry, by making strict patent law. ‘The combined worth of the world’s top five drug companies is twice the combined GDP of all sub-Saharan Africa and their influence on the rules of world trade is many times stronger because they can bring their wealth to bear directly on the levers of western power’ (Borger 2001).

One of the leading US biotechnological companies, Genentech, has four times as many lawsuits to protect its patents as it has products (Fowler 1996). At least one company has been created in the US whose ‘main business,’ according to the Wall Street Journal, ‘is buying up broad patents and then sueing other companies for alleged infringements’ (Fowler, 1996).

Thus, there is also the issue that investing so much money and time in litigtion is highly unproductive, when this money could be better spent on research and development of new drugs, and subsidising the cost of essential drugs in developing countries.

2.2 Investment priorities

The world market for pharmaceuticals shows a clear division: non essential drugs are produced and targeted at developed countries promising high profits, while developing countries are still in need of basic healthcare and essential drugs.

Of the 1223 new drugs marketed between 1975 and 1996, only 13 were developed to treat tropical diseases – and only four were directly the product of pharmaceutical industry research. In recent years, drug companies have produced thousands of new compounds but less than 1% are for tropical diseases .

In 1998, global spending on health research was US$70 billion , but 90% of the money spent on health research and development focuses on medical conditions responsible for only 10% of the world’s burden of diseases (Benatar 2000). Only US$300 million was dedicated to research for vaccines for HIV/AIDS and only US$100 million to malaria research, diseases with the highest mortality and morbidity rates in the world, and devastating in developing countries.

‘It would be more profitable to develop a drug designed to enhance sexual performance for Anglo-American males than to develop a medicine designed to treat or prevent malaria’ (Resnik 2001).

There is also the suggestion that pharmaceutical companies focus more effort on a certain drug in developing countries when it is in their research interest; “Of diseases in the Third World, AIDS is getting the most attention and focus. Not coincidentally, it is also one of the few diseases that remain a threat to First World countries” (Censored 2000).

Pharmaceutical companies are able to devote their resources to non-essential drugs targeted at the richer markets of developed countries and at the same time, exploiting the markets in developing countries by influencing the world price for drugs. For example, pharmaceutical companies have long resisted “differential pricing” on their US$12,000-a-year courses of anti-AIDS drugs, which would allow a course to cost less in Cameroon than in Canada . Thus, the effect of purchasing power parity means that the prices are even higher in real terms in developing countries.

Drug Aid

In many cases, drug companies will provide drugs to developing countries at cheaper cost as aid. For example, in March 1998 Glaxo Wellcome (UK) announced that it would sell its anti-HIV drug AZT for 70 per cent below the normal price to pregnant women in developing countries . However, drug aid is not always beneficial. Reich et al (1999) found that out of 16,566 drug donations shipped from the US to 129 countries between 1994 and 1997, 10-40% were listed on neither the national essential drug lists nor the WHO model of essential drugs in developing countries. Also, 30% of shipment items had a year or less of shelf life (ibid.).

Advertising and false claims

There is also evidence that companies, in addition to prioritising non-essential drugs for developed countries, exploit markets in developing countries by convincing people that they need non-essential drugs. A survey, in the Annals of Internal Medicine found that ‘62 per cent of the pharmaceutical advertisements in medical journals were either grossly misleading or downright inaccurate’ (Madeley 1999).

There has been much criticism of the advertising in developing countries, claiming it is particularly persuasive in nature and that people are misinformed and encouraged to believe wild promises. This illustrates the exploitative nature of the pharmaceutical industry, and the quest for profit at the expense of health.

“In the corporate headquarters of major drug companies, the public relations posters display the image they like to present: of caring companies that bring benefit to humanity, relieving the suffering of the sick. What they don’t say, is that, so far, their humanity has not extended beyond the limits of the pockets of the sick” (Hilton 2000).

In summary, the pharmaceutical industry is for profit. A handful of economically powerful companies use economies of scale to exploit the markets of developed and developing countries. As a whole, the pharmaceutical industry is:

? Priortising investment in non-essential comfort-oriented drugs for the wants of the more affluent in developed countries, whilst neglecting the needs for essential drugs for poorer people, particularly in developing countries.

? Investing heavily in litigation and patents to restrict competition from other companies, and enable control over the price and availability of drugs.

? Exploiting people in developing countries, using persuasive advertising to make false claims.

? Motivated by profit, not health.

As Smith (1994) points out, ‘There is a direct conflict between the pursuit of health and the pursuit of wealth.’

2.3 Diffusion

Policymakers and representatives of the pharmacetuical industry argue that relevant technology reaches poorer people by means of ‘diffusion.’ This describes the process by which drugs become available to the poor after patents expire, and when competition to make the drugs drives down the prices of the drugs so that poorer people can afford them. However, as agents of disease, including bacteria and viruses, are continually adapting to drugs and developing resistance to them, new drugs are often essential and life saving, which means it is critical they are available very soon after production in developing countries. Patents reduce the availability of new essential drugs, because they increase the time it takes for diffusion to take place, if it happens at all.

The lack of infrastructure in developing countries makes it difficult for essential drugs to reach those who need them, which can increase the time it takes for technology to ‘diffuse’ to the poor, even after patents have expired. For example, oral rehydration therapy, a simple and cheap salt-and-sugar solution, has been mass distributed since the 1980s and has greatly reduced child deaths from diarrhoea, ‘but even though it only costs 10 cents a sachet, it is still unavailable for 38% of diarrhoea cases in Third World countries.’ Another example, Penicillin, discovered in 1928 and first marketed in 1943, is unavailable to 2 billion people. (Healey 2001)

The unavailability of essential drugs therefore extends beyond a lack of access to new drugs designed to treat devastating infectious diseases [essential drugs] (Resnik 2001). 50% of people in developing nations do not have access to even basic medications, such as antibiotics, analgesics, bronchodilators, decongestants, anti-inflammatory agents, anti-coagulants and diuretics (Reich 1979-1981).

In the 1980s structural adjustment programmes were enforced on developing countries by the International Financial Institutions (IFIs), such as the World Bank and International Monetary Fund. These trade liberalisation policies involved the establishment of ‘export-processing’ zones, which offered financial incentives, such as tax concessions, to companies. By favouring privatisation and encouraging multinational companies to move their operations to developing countries, one of the supposed objectives of economic liberalisation was to assist ‘development’ and the transfer of pharmaceutical technology to developing countries.

However, there has been a lack of ‘diffusion’ of knowledge and technology. In fact, it is the lack of technology transfer measures in export-processing zones that attract pharmaceutical multinational companies. With firm control over technology, even when high-tech methods of production are used they can be kept away from the domestic economy. The southern Indian city of Bangalore has, ‘thanks to Western companies’ passion for outsourcing, grown into one of the world’s premier technology hubs and is the centre of the India’s growing IT industry’ (its export revenues rose from US$150 million in 1990 to $4 billion in 1999). However, areas surrounding Bangalore are in fact extremely ‘low-tech’. In Karnataka (also state capital), there were still only 2.73 internet connections per 1000 people in 1999; in even poorer states (like Orissa), that rate dropped to 0.12 connections per 1000 people.

‘As it turned out, there has been virtually no transfer of relevant technology by these companies to developing countries … in fact, by using the power that control over technology brings, they have eliminated many potential competitors and prevented indigenous pharmaceutical industries from developing to meet the real needs of the people of the third world’ (Kanji et al 1992). Thus, the evidence leads me to personally agree with this line and disagree that diffusion can be relied upon to make essential drugs available at times when they are needed most in developing countries.

Multinationals provide employment in developing countries, it is typically very low paid with little security, and the products (and the techniques and profits) go back to the companies of developed countries. Unfortunately, even though direct foreign investment provides low-paid jobs and does not transfer technology, those jobs are still vital for many that live in poverty and have limited employment options. This highlights why re-regulation of the corporate sector is required so that markets meet certain social criteria. For example, interfering with markets to reduce the price of essential drugs in developing countries.

“Pharmaceuticals, they are a commodity. But they are not just a commodity. There is an ethical side to this because they’re a commodity that you may be forced to take to save your life. And that gives them altogether a deeper significance. But they [big pharmaceutical companies] have to realize that they’re not just pushing pills, they’re pushing life or death. And I believe that they don’t always remember that. Indeed I believe that they often forget it completely.” (Drummond 2003)

3. GENERIC DRUG INDUSTRIES AND ESSENTIAL DRUGS

In many countries with large poor populations, such as Argentina, China, Egypt and India, national policy enabled a locally financed pharmaceutical industry to develop almost exclusively engaged in manufacturing generic drugs. These industries could ‘copy cat’ certain drugs and in some cases the manufacturing processes of other pharmaceutical companies.

This Chapter illustrates the main benefits to health of generic production in developing countries, in terms of increasing the availability of essential drugs. It uses India as a case study.

Benefits

In countries with generic drug industries, drug prices are low because the primary national objective is for the government to provide affordable drugs for its people, and develop the industry for economic welfare and greater self-sufficiency. India holds a record, with prices for many drugs 10 to 100 times lower than in developed countries. The introduction of generic antiretroviral drugs by Indian companies reduced the price of these drugs by 97% (Henry et al 2002). Research and development efforts by generic drug industries have also led to the development of vaccines against leprosy and hepatitis B, and anti-cancer drugs .

Multinational companies have less economic control over the market because the domestic drug industry controls the domestic market. Therefore, poorer people are less dependent on multinational companies and the extortionate prices that they can charge for drugs. In addition to lower cost, as will be seen from the case study of India, generic drugs have the advantage of being competitive in quality to those produced by large multinationals, originating from developed countries.

A case study of India

In India, multinationals held only a 20 per cent market share in 2000 : national pharmaceuticals have gained knowledge and capacities in research and development, which has enabled them to replicate manufacturing processes for already known drugs, and develop a bulk drug industry for various chemicals and antibiotics.

India’s local drug companies have long benefited from a relaxed patent regime.

History of patent law in India (up until the 1970s)

1856 The Act Vi Of 1856 On Protection Of Inventions Based On The British Patent Law Of

1852 Certain Exclusive Privileges Granted To Inventors Of New Manufacturers For A Period Of 14 Years.

1859 The Act Modified As Act Xv; Patent Monopolies Called Exclusive Privileges (Making. Selling And Using Inventions In India And Authorising Others To Do So For 14 Years From Date Of Filing Specification).

1872 The Patents & Designs Protection Act.

1883

The Protection Of Inventions Act.

1888

Consolidated As The Inventions & Designs Act.

1911

The Indian Patents & Designs Act.

1999

On March 26, 1999 Patents (Amendment) Act, (1999) Came Into Force From 01-01-1995.

1972

The Patents Act (Act 39 Of 1970) Came Into Force On 20th April 1972.

Source: Adapted from http://www.legalserviceindia.com/articles/patents_geographical.htm accessed 10th November 2004

In the past, India honoured patents on manufacturing processes but not patents on products, which allowed generic drug companies to ‘reverse engineer and manufacture drugs’ without paying royalties to the companies who own patents on those drugs (McNeil 2001).

The features of the 1970 Patents Act helped to promote India’s pharmaceutical industry, which specialises in generics. It has enabled considerable technological innovations and development of knowledge, with its provisions enabling the drug industry to grow at a rapid pace. (The Lancet, 2004)

The Indian Pharmaceutical industry is the pre-eminent sector in India, in terms of scientific and technological developments. India ranks among the top 15 drug manufacturing countries in the world. In 2004, the domestic drug industry met approximately ‘70% of India’s demand for bulk drugs, drug intermediates, chemicals, pharmaceutical formulations in the form of tablets, capsules and orals’ (Lancet 2004). India’s generic drug industry has enabled a huge number of people to afford essential drugs that would have otherwise been out of reach because of patent induced high prices and unavailability. Generic production therefore promoted self-sufficiency and assisted economic development.

“The Indian firm Cipla’s offer to MSF [Médecins sans frontiéres] to provide a cocktail of antiretrovirals for less than $350 a year (compared to the big boys’ $10,000) resounded like a thunderbolt. Suddenly, the emergence in the South of very low cost generics producers seems credible” .

4. IMPACTS OF THE TRIPs AGREEMENT

This chapter discusses the impacts of the TRIPs agreement (January 2005) on India’s pharmaceutical industry. It starts by mentioning the pressure and reasoning behind India’s decision to comply with TRIPs, and then examines the positive and negative aspects of the agreement, which might emerge in the next few years.

India amended the law governing patents i.e. Patents Act, 1970 by Patent (Amendment) Act, 2002, on 20th May 2003.

The main features of Patent Act, 2002, were:

? Enlargement of non-patentable inventions

? Twenty year patent term for all patents

? Burden of proof on defendant in case of infringement when a patent is for the process of producing a new product

? Making importation a right of a patentee

This Act prepared India for full TRIPs compliance, and currently, India is adapting to the changes to the pharmaceutical industry under the TRIPs Agreement, which came into force on January 1st 2005.

Indian companies have now lost the opportunity to develop processes for patent protected drugs. This could allow multinational companies to establish a monopoly over the Indian drug market, unless Indian pharmaceutical companies can compete.

Pressure to comply with TRIPs

There was pressure for India to meet TRIPs requirements because India would have otherwise been disciplined by the WTO, and ‘India’s market access rights would have been jeopardised’ along with other benefits (Lancet 2004).

There was intense lobbying, predominantly by the United States pharmaceutical industry, to impose the TRIPs agreement. PhMRA claimed that the US pharmaceutical industry loses US$500 million annually only through a lack of patent protection on drugs in India . The GlaxoSmithKlein CEO Jean-Pierre Garnier described the Indian pharmaceutical industry as price-undercutting “pirates”, and said the company “is not doing this to get a Nobel Prize.”

In response, Hamied, on behalf of the Indian pharmaceutical firm CIPLA, said “Indeed, we are a commercial company. But I market 400 products in India. If I don’t make money on a half-dozen of them, it’s no big deal. I don’t make any money on the cancer drugs we sell or drugs for thalassemia, a blood disorder that’s common in India. We sell these drugs virtually at cost because I don’t want to make money off these diseases which cause the whole fabric of society to crumble. India alone will have 35 million HIV cases by 2005, and it’s something we can’t afford.” (Lindsey 2001)

4.1 Main advantages

On the one hand, TRIPs could promote more research and development and stimulate competition to produce new drugs. On the other hand, India will lose its ability to generically produce essential drugs for its majority poor population.

Generic drug production in India has meant that research and development of new drugs has taken a back seat. Indian companies are ‘getting actively engaged in research and development of their own molecules/pharmaceutical products and processes . The Indian government is providing a range of tax concessions designed to encourage research and development, including a 10-year tax holiday on income arising from research and development. (Lancet 2004)

Thus, TRIPs is increasing investment in the research and development of new drugs. It promotes economic growth of the Indian drug industry, because companies now have patent induced control over the price and availability of new drugs. India already has more pharmaceutical products approved by the United States Food and Drug Administration (FDA) than any foreign country, which is helping the industry to obtain and enforce patents. The Indian pharmaceutical industry will be able to increase its contribution to drug discovery and development, which, given the cost-effectiveness of research and development in India, can only increase. (BJU 2003)

‘TRIPs will cement India’s position as a global pharmaceutical outsourcing hub and offshore location for research and development and other support services including strategic services in patenting and related matters.’ India is also becoming an attractive location for the outsourcing of patent drafting . In addition to these benefits to the industry as a whole, TRIPs has also imposed higher quality standards for drugs and processing.

Proponents of TRIPs argue that patent induced privatisation of the industry will lead to growth of the domestic industry that will increase the availability of all biotechnology products to poor people i.e. diffusion. However, as mentioned before, patents can reduce the availability of new essential drugs by restricting short term diffusion. Thus, although TRIPs may encourage more research and development of drugs, these drugs will be less available to poorer people who cannot afford them at times when they need them most.

However, there are counter-arguments that TRIPs will not make new drugs unaffordable. For example, Shantha Biotech, which was first to launch the indigenously developed hepatitis-B vaccine in the country in 1997, has secured the World Health Organisation (WHO) certification for its product “Shanvac B” (now marketed at “Hepashield”). Shantha is the only company in India to get this certification for the hepatitis-B vaccine, and it is being provided at a quarter the price of the previously imported vaccine (Jayaraman 2001).

However, despite greater availability of a few specific drugs, linked to some Indian companies obtaining licenses, the price of new drugs over the next few years is likely to be relatively high in terms of what the population is used to and can afford.

4.2 Main Disadvantages

Under TRIPs, there will be more consolidation in the pharmaceutical industry, as larger companies are more capable of using patents to secure higher profits. Linked to economies of scale, these companies will be able to exploit the patent system to out-compete other companies. Multinationals such as GlaxoSmithKline, which already operate in India, will have a particular advantage. Smaller companies will be less capable of buying into the strict patent system. Merely securing a patent from America’s patent office costs at least $4000. Defending it in court can cost millions (Economist 2002).

Although TRIPs does not patent old drugs already on the market, there is still a backlog of products waiting for grant of product patents, some which may already be on the market, as product claim applications have been filed since January 1 1995. Unless Indian companies have stopped manufacturing such drugs completely, a large number of litigation and infringement suits will ensue .

TRIPs restricts India’s generic industry and longer patents provide additional incentive for foreign investment in India. This could actually pose a threat to India’s pharmaceutical companies. At an international level, Indian companies’ advantage in cheap vaccines for hepatitis or rabies may be eroded by potential development of cocktail vaccines that promise delivery of multiple vaccines in a single shot (Jayaraman 2003). Although TRIPs encourages growth of the industry and creates some large winners, it creates many losers.

Since the 1970s, India’s poor population has benefited from a range of drugs available at relatively low prices. The industry is efficient at making generic varieties and has a number of different companies able to produce such drugs, which means that new drugs on the market can be imitated both quickly and easily. This provides a means of sharing the benefits of technological advancement in developed countries with developing countries, usually isolated by a gap in technology. According to some reports, India is home to the fastest growing rate of new infections in the world (Hankins 2003). Without the benefits of generic drug production, the population of India could suddenly be faced with a health crisis.

According to a recent Times of India report; the price of cancer drug Gleevac has risen from to Indian Rs120, 000 ($2,590) from its price just a few months ago of Indian Rs4000 ($86.35) – 30 times more, because of TRIPs .

4.3 The Doha Agreement and Compulsory Licensing

TRIPs has a clause that allows governments to override patents and provide essential drugs to the poor in some circumstances. Working with Non Government Organisations (NGOs), Brazil and a group of African countries pressured policymakers to revise TRIPs. The meeting in Doha, November 2001, between the world’s trade ministers attempting to organise a new round of trade negotiations (Health Affairs 2004), led to the Doha “Declaration on the TRIPS Agreement and Public Health.” This declaration affirmed that TRIPS “should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all.”

‘It affirmed the right of nations to use the exceptions of TRIPS, such as the compulsory licensing provision, to meet public health concerns, specifically stating that “public health crises, including those related to HIV/AIDS, tuberculosis, malaria and other epidemics, can represent a national emergency” and thus facilitate the right to use compulsory licensing’ (World Trade Organisation Declaration 2001).

‘Governments can issue compulsory licenses to allow other companies to make a patented product or use a patented process under licence without the consent of the patent owner, but only under certain conditions aimed at safeguarding the legitimate interests of the patent holder’ . For example, the Supreme Court of India may interfere to justify the dispensation of drugs at an affordable price on the grounds of concern for public suffering. They can grant a compulsory license for companies to produce a generic drug. If required, the government may also fix the price of these drugs as well as the royalties to be paid to the inventor for the remaining term of patent .

A further 30 August 2003 Amendment to the Doha Agreement enables governments to let their pharmaceuticals generically produce drugs for other countries, as well as their own people, in times of ‘acute suffering.’ Previously, Article 31(f) of the TRIPS Agreement stated that products made under compulsory licensing must be “predominantly for the supply of the domestic market”. (WTO Press Release 2003) This applied directly to countries that could manufacture drugs, limiting the amount they could export. It will now be possible for countries to import cheap generic drugs in times of ‘acute suffering’.

This was regarded as a victory by the developing world and as a defeat by the research-based drug industry.

However, there are serious questions as to whether compulsory licensing can even work. ‘No generic medicines have been manufactured this way in the past decade, treating no patients in any country worldwide’ (Attaran 2003). ‘Threats of compulsory licensing might be useful when rattling sabres with drug companies to lower medicine prices, but only a single (and unusually powerful) developing country, Brazil, has ever succeeded in doing so. As such, compulsory licensing or the threat of it has seldom had any practical effect for public health’ (Attaran 2004).

Nevertheless, the pharmaceutical industry in developed countries has objected, with the United States leading the objections. ‘America’s drug industry has fought tooth and nail to impose the narrowest possible interpretation of the Doha declaration, and wants to restrict the deal to drugs to combat HIV/Aids, malaria, TB and a shortlist of other diseases “unique to Africa” .’ This means that the industry is against the use of compulsory licencing, and only prepared to accept its use in Africa, which is very unethical when most developing countries do not have sufficient access to essential drugs. It highlights the ruthlessness of paharnceutical companies, in terms of seeking maximum profit even at the expense of the world’s health.

Compulsory licensing and the amendments to TRIPs are positive in respect to health care in developing countries. The changes suggest that governments do respond to pressure and there has already been some admission on their part that TRIPs could be revised under a more ethical framework. However, even with these amendments, TRIPs does not tackle the root problems of unequal power relations between developed and developing countries, which give rise to the unequal access to pharmaceutical biotechnology.

5. CONCLUSION

This chapter argues in favour of alternatives to TRIPs. It starts by summarising the benefit of increased public funding in research and development. It shows the close ties between science, business and government and goes on to explores wider policies, highlighting the ways that the scientific community can promote more ethical drug policy.

Public funding

If a larger proportion of research and development of new drugs was publicly funded, then this would encourage more investment into the development of essential drugs, which are needed in developing countries.

Data submitted to the Joint Economic Committee of Congress by the National Bureau of Economic Research reveals that public research, not private, led to 15 of the 21 most essential drugs introduced between 1965 and 1992, and other studies in the 1990s suggest that only a minority of important drug discoveries in recent years (estimates range from 17% to 40%) were the result of commercial research (O’Leary 2002). This shows that public funding is paramount to the production of essential drugs, and therefore to health in developing countries. The combined effect of shortening patents and increasing public funding in the pharmaceutical industry would ensure that not only are more essential rugs produced, but that they also reach those who need them.

The next section shows that scientists need to devote more attention to the unethical nature of drug policy and voice concerns to the public. This involves deconstructing a scientific agenda from the economic agenda of government and big business.

Governments, science and big business

Scientists ideally work to discover “truth” and gather knowledge to help people. Research and development, however, tends to be profit-driven, and there are conflicts between seeking scientific advancement and helping people, because helping people is not always profitable. Government policy supports the pharmaceutical industry, as strict patents favour the expansion if the industry and economic growth. Although business and governments are therefore dependent on scientists to design new drugs and technology, their common agenda allows them to exert political and economic control over science. Any social objective to deliver essential drugs to the poor is lost in this agenda. Scientific search for ‘truth’ therefore becomes a quest for profit, because of the vested interests of government and business.

The United States Office of Management and Budget reported that academia, in addition to federal funding, receives millions of dollars for research from donors and the private industry.

“Bioethicists at the University of Toronto take funding from GlaxoSmithKline, Pfizer and Merck to write editorials on bringing biotechnology to the developing world . . . Bioethicists at the University of Pennsylvania take money from Pfizer to write an article explaining why physicians should not accept gifts from companies like Pfizer. (Engler 2004) This shows the irony whereby large companies control information which should criticise their activities.

In the United States, even federal money comes with strings attached. Federally funded experiments and research are subject to massive amounts of bureaucratic regulation and oversight. Members of academia are now increasingly involved in the private sector. ‘This means that, even in basic research, funding is not free from profit motives or federal regulation, and the research is not necessarily a pure drive for more knowledge .’ Thus, it is hard to separate science from the profit motives of business and politics, which share a common agenda. Scientific information can be biased because it is conditioned by this agenda.

‘Today the most powerful players outside government are private corporations. They contribute financially to political parties in the US, Europe and elsewhere and a neo-liberal trade agenda has become the mantra of virtually all elected political parties. The price governments have to pay for this support is to ensure that their electoral platform corresponds quite closely to the agenda of big business.’ (Shutt 2001)

It is unfortunate that science, politics and business are so intertwined that it is difficult for the benefits of biotechnology and knowledge to jump the political and economic hurdles to reach developing countries.

It means that scientists need to be more vigilant about the type of drugs they help to produce, and what they endorse. Moreover, the scientific community need to play a more active role in raising awareness about pharmaceutical issues, so that people become more informed and capable of working with other groups, such as NGOs and members of the scientific community, to press governments for change. Scientists and the public can apply pressure to regulate the corporate sector, by imposing corporate social standards in the trade of drugs, and deconstruct those pressures from big business that controls science and information.

Public mistrust

Governments have control over science. They manipulate the science often finding a balance between where public support lies and where the money lies. This has resulted in public mistrust and scepticism in science. In the UK, for example, the public was informed by government that BSE could not be transmitted from cattle to humans, and the government promoted British beef and the industry for around ten years, before it emerged that there was a human form of the disease, variant CJD. Mistrust and scepticism was the result.

Scientific ignorance can also weaken the ties between science and the public. People may ignore the science because it is viewed as obscuring a larger picture (Michael, 1996). Science can be difficult to understand and, as mentioned, communication through the media reflects the agenda of business and government. If people do not trust the scientific media or understand the science of issues, their uncertainty can be compounded by a general mistrust of science and the scientific community. It is also important to consider that people also have different views on issues, which highlights the need for better communication and debate. New abortion procedures to people who are already pro-life are simply ‘more efficient ways to kill unborn babies,’ whereas to pro-choice advocates they are safer, less intrusive ways of protecting the choices and health of mothers .

People need to feel that a scientific organisation has no vested interests. This is why independent organisations for public scientific awareness and education are important to build up this trust. In Britain, this includes COPUS (Committee on Public Understanding of Science) run by the Royal Society. There is also the Wellcome Trust, which informs the public on science policy and practice (as well as contributing to researching social implications of sciences) “The culture of science needs a sea-change, in favour of open and positive communication with the media.’ If these independent scientific institutions, collaborating with NGOs and the scientific community, can succeed in informing and educating people, ‘it will pay for itself many times over in renewed public trust’. (UK Select Committee on Science and Technology 2000)

Agreeing with this line of thinking, if independent scientific organisations can give more attention to health problems in developing countries, then they can raise public awareness about these issues. The potential to change policy rests on a more informed public.

Individual scientists and the scientific community, collaborating with independent organisations, can debate ethical issues and highlight the importance of improving health in developing countries by increasing the availability of essential drugs. “Some of the favourite topics of bioethicists seem trivial compared with the important health issues facing people in the world’s poor countries and in impoverished regions in rich countries” (BMJ 2004). “The risk of dying from maternal causes in sub Saharan Africa is 1 in 16. In Western Europe it is 1 in 4000.” Bioethicists could focus their attention on the morality of a world system that allows “500 000 girls and women [to] die every year – 99% in developing countries – from preventable conditions and injuries related to pregnancy and childbirth.” (Lancet 2004)

It is especially important to make younger people more aware of the issues pertaining to the use of strict patents, in order to produce an informed public in the long term. Thus, there needs to be more attention to such issues in colleges and universities, as part of a curriculum, then younger people could debate for themselves the fairness of TRIPs. Again, a more informed public would be less likely to accept the ‘unfair’ policies enforced by their governments.

Therefore, policy must change. After all, it is the wider policies that enable corporations to exploit poorer people, who cannot afford to buy into technology. Roy Vagelos, the former head of Merck, claims that “‘A corporation with stockholders can’t stoke up a laboratory that will focus on Third World diseases, because it will go broke’ … ‘That’s a social problem, and industry shouldn’t be expected to solve it .’ Although biased from an industry viewpoint, he does make the point that companies are by definition profit motivated and that giving companies greater freedom is not in the best interests of health, especially poorer people.

Historical policy context

‘One cannot separate economics, political science, and history. Politics is the control of the economy. History, when accurately and fully recorded, is that story.’ (Smith, 1994). There are wider policies that need to be considered. Patents are a form of imperialism.

In the nineteenth and twentieth centuries rich, powerful states, including Britain and other European countries, exploited third world colonies. Richer states exploited the natural resources and workforce of the colony, and efficient supply chains were constructed for this purpose, based on unequal power relations. Although developing countries gained economic dependence in the 1960s and early 1970s, an economic dependence continued. Developed countries lent large sums of money to developing countries, and these debts became unpayable due to the rise in interest rates. Developing countries, instead of investing in health, still have to repay these debts, and they have become economically dependent on the companies and governments of developed countries, who control trade policy.

Thus, based on a historical trade policy context, governments in developed countries have the responsibility to help developing countries supply drugs to their populations.

‘Enormous agricultural subsidies ($310 billion) in developed countries deny the agrarian populations of poor countries the opportunity to export products and accumulate wealth’ (OECD, Paris 2002). The subsidies alone are roughly equal to the entire gross domestic product (GDP) of sub-Saharan Africa. ‘Redirecting just 1 percent of this government spending to global health would more than double the foreign aid spent to control HIV/AIDS, malaria, and tuberculosis combined.’

President Yoweri Museveni of Uganda opines that giving priority to medicine patents in trade negotiations has been a “red herring” and that “if there were no agricultural subsidies…we [Africans] would earn enough money to buy all the drugs we want” (Wall Street Journal Editorial 2003). Although I think that reducing agricultural subsidies is just one element of improving pharmaceutical infrastructure in developing countries, he makes a valid point that improving the distribution of drugs is linked to redistributing wealth between countries.

Kanji et al (1992) take this further to point out that a country’s pharmaceutical and health policy cannot be isolated from its general development startegy. November et al 1982 elaborates by stating that ‘dependence on products [drugs] and the agents and institutions which make them available, fosters the notion that the solution to illness resides in the purchase and consumption of medications rather than improvements in living condtions’ (November et al 1981).

I agree with this line of reasoning that links the unavailability of essential drugs in developing countries to wider policies, and highlights the need for more sustainable development that takes into account the vulnerability of the poor by imposing strict social criteria in drug policy and trade, rather than strict patents (economic criteria). It should be emphasised that shortening the time length of patents is one important factor among many that could improve the avilability of essential drugs and all round healthcare in developing countries.

Melrose, 1982, says that ‘companies should keep to their declared obligation of making sure that drugs “have full regard to the needs of public health” and demonstrate special social responsibility in poor countries by not advertising non-essential multivitamin tonics, cough and cold preparations and expensive and irrational combination drugs (Melrose 1982).’ Although I agree that corporations need to behave more responsibly, this should be a legal prerequisite rather than an ‘obligation.’

Ironically, there is great potential and ability of the large pharmaceutical firms, which have been so criticised in this text, to develop more essential drugs for the poor. The private sector has a great deal of knowledge and capital, which can be used to produce new essential and non-essential drugs. Thus, although public funding would help to give priority to essential drugs, the private sector should still contribute significantly. This is especially the case in the foreseeable future because the private sector is largely responsible for the production of all new drugs. ‘If Pfizer, Merck, Glaxo-Wellcome, and other pharmaceutical companies do not develop drugs that plague developing nations then …there is a real danger that people in developing nations will become therapeutic orphans’ if the pharmaceutical companies lack the proper incentives to develop drugs for the developing world’ (Reich 1979-1981).

Thus, the final part of the conclusion looks at ways of regulating the corporate sector.

Regulating the corporate sector

Governments can regulate the pharmaceutical industry in two broad ways, either by direct control, usually by making legal requirements, or by creating incentives. A mixture of the two strategies can be effective.

Control involves regulating and monitoring biotechnology companies and pharmaceuticals through the creation of legal requirements. For example, when these organisations develop drugs/ vaccines, governments can mandate them to comply with research and manufacturing standards to ensure products are safe and efficacious . Governments can control drug prices furthermore because they often have authority over the granting and use of patents. For example, in the US, the government has the right to license drugs to other companies if the patentee does not make it available to the public on reasonable price and terms. Such a right is currently focused on drugs that have been developed with public support . It needs to extend to drugs developed with private support.

Although laws are paramount in regulating corporate conduct, there is the issue that corporations have no moral obligations over and above the requirement to comply with the law (Friedman 1970). Governments can, in this regard, create further incentives for these organisations to engage in developing drugs/ vaccines that benefit populations in developing countries. For example, it could create subsidies or offer grants for research in certain areas. The Orphan Drug Act, introduced in the US in 1983, creates tax and marketing incentives for those companies that engage in creating drugs for rare diseases. Also, governments could commit to purchasing future critical drugs/ vaccines in order to minimise the ‘private entity’s financial risk’ .

Ideally, TRIPs should be replaced by policy which curtails the power and influence of the private sector, by shortening the time length of patents, allowing generic production in developing countries, and at the same time increasing public funding of research and development.

In summary, making more ‘ethical’ drug policy is dependent on:

? International policies

- removing TRIPs, shortening the length of patents; allowing developing countries to generically produce essential drugs.

- subsidising research and development of essential drugs.

- regulating the corporate sector: ensuring that essential drugs are reasonable priced; ‘a price that allows the company to earn its money but also promotes accessibility and equity’ (Brody 1996) & (Spinello 1992).

? National policies

- providing funding and technical support for NGOs who raise awareness of the issues surrounding the use of strict patents in the pharm,aceutical industry.

- Promoting education in schools; collabortaing with independent scientific organisations to provide information publicly, through the media.

- Setting an example by increasing public funding in research and development; prioritising investments in essential drug production; greater transparency; governments more accountable to the public than companies.

- Campaigning for fairer drug policies at the international level

? Education and public awareness

- Informed people in developed countries, able to raise issues pertaining to the use of strict patents and resist ‘unfair’ policies.

? The role of the scientific community

- a scientific community that focuses more on third world issues and health problems, and raises awareness about the underlying policies that cause an imbalance in wealth and health.

- Independent scientific organisations that can communicate information to the public and collaborate with scientists and NGOs, and raise concerns with business and government.

- campaigning for ‘truth’ and sharing of knowledge, as well as more regulation of the corporate sector, and governments who are more accountable to the public.

This paper highlights the interconnectedness of social, economic and political factors which can improve the availability of essential drugs in developing countries.

To end on a more positive note, pharmaceutical companies have created life-saving drugs which have helped to save millions of lives, but these drugs have tremendous potential to save many more lives and alleviate suffering by helping to curb the incidence of various infectious diseases, which cripple the social and economic fabric of developing countries. The paper also highlights the importance of better understanding the impacts of TRIPs in developed countries, so that governments are pressed to change policies at the national and international level. The role of the scientific community is critical, in terms of having more say and control over drug policy, and helping to increase public awareness about drug policy. Ultimately, a concerted effort between the scientific community, public and NGOs can resist ‘unfair’ drug policy and some of the exploitative practices of pharmaceutical companies.

7. REFERENCES

Books/Journals

Attaran, A. (2003) Assessing and Answering Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health: The Case for Greater Flexibility and a Non-Justifiability Solution. Emory International Law Review 17, no. 2 (2003): 743–780.

Benatar, S. (2000) Avoiding Exploitation in Clinical Research. Cambridge Quarterly of Healthcare Ethics 2000; 9: 562-65

BJU (2003) Fitzpatrick (Ed) International Volume 92 No

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