1 Markets for Pharmaceuticals And
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MARKETS FOR PHARMACEUTICALS AND ABSORPTIVE CAPACITY IN DEVELOPING NATIONS: THE CASE OF TRANSITION ECONOMIES Brigitte Granville and Carol Scott Leonard Abstract This paper concerns the contribution of knowledge externalities to the expansion of pharmaceuticals production and sales in developing nations. It highlights the implication of the rapid pace of expansion in transition economies of the pharmaceuticals sector to suggest policy implications of skills development. The rough model developed in this paper suggests that there is a synergy between the particular characteristics of pharmaceuticals production, process development and marketing strategies, and existence in a country of a strong educational foundation and past practice of spending. Neither trade liberalization nor TRIPS requirements are likely to suppress the spread of research and innovation and of generics production, which are a result of knowledge distribution and spillovers as well as property rights protection. JEL classification I11 KEYWORDS: Pharmaceuticals, learning, Development, Transition Economies Address for correspondence: Dr. Brigitte Granville Dr Carol Scott Leonard Professor of Business Management Fellow, St Antony’s College Centre for Business Management Oxford University Queen Mary, University of London Oxford. OX1 2JD. UK London E1 4NS, UK Email: [email protected] [email protected] 1 MARKETS FOR PHARMACEUTICALS AND ABSORPTIVE CAPACITY IN DEVELOPING NATIONS: THE CASE OF TRANSITION ECONOMIES Brigitte Granville and Carol Scott Leonard ABSTRACT This paper concerns the contribution of knowledge externalities to the expansion of pharmaceuticals production and sales in developing nations. It highlights the implication of the rapid pace of expansion in transition economies of the pharmaceuticals sector to suggest policy implications of skills development. The rough model developed in this paper suggests that there is a synergy between the particular characteristics of pharmaceuticals production, process development and marketing strategies, and existence in a country of a strong educational foundation and past practice of spending. Neither trade liberalization nor TRIPS requirements are likely to suppress the spread of research and innovation and of generics production, which are a result of knowledge distribution and spillovers as well as property rights protection. INTRODUCTION This paper concerns the contribution of knowledge externalities to the expansion of pharmaceuticals production and sales in developing nations. Technical change and technological learning have been shown in the literature to be essential for long term growth and economic convergence, and specifying that relationship has been at the core of fundamental theories of growth, although empirical documentation has been challenging. The impact of accumulated knowledge is generally assumed by estimating the aggregated impact of externalities or technological spillovers, as in neoclassical endogeneous growth theory, or as a joint product in the classical theory of production. Such externalities are made possible at the macro level of the economy by foreign direct investment (FDI), joint ventures, strategic alliances, technology licensing, subcontracting and embodied technology transfer. At the micro level of the firm, accumulated knowledge is roughly equivalent to absorptive capacity – the capacity of management to assimilate technical knowledge from both home and abroad, from inside and outside the firm. The paper provides a framework for modelling the contribution of learning for one high technology sector by focusing on the transition conditions, where capacity is especially visible. The exceptionally high levels of education and transferable skills found in transition economies, some with considerable high technology trade, underscores with some 2 quantitative documentation the empirical foundations for the role of human capital, a point which has not been easy to demonstrate in the literature.1 It is also suggestive of policies appropriate for developing countries. Our model presents the link for a broad cross-country analysis, including emerging and transition markets, and our descriptive material is for transition economies. In post-Communist Central and Eastern Europe (CEEs), SBIs (Science Based Industries) such as pharmaceuticals showed sustained strength. In general, there is evidence of the impact of high levels of education and skills developed during the Communist era, when investment in education was substantial. Most CEEs are at the level of most advanced economies, as evidenced by any indicators of schooling and research. We argue that this infrastructure—broadly speaking—has had a powerful impact on a market such as pharmaceuticals. The knowledge and infrastructure base upon which host country markets in the developing world grow is well established in the literature as spillovers from MNEs, studied widely since the writings of Vernon (1966). We anticipate that technical skills among the educated labour force and usable infrastructure help explain the hardiness and expansion of the pharmaceutical sector in the troubled 1990s across the region. Pharmaceuticals is just one sector of SBIs, the larger frame of reference for the most high intensity knowledge-based industries. Among SBI, the pharmaceutical sector is especially welfare generating. Pharmaceuticals assist growth not only as an engine of technological change as a science based-industry but also as a provider of essential medicines of benefit to public health. Drug production and sales affect welfare by lowering the cost and raising the drug availability in countries where public sector health expenditures are especially low due to fiscal stress, a circumstance common to transition and emerging economies. There are also large gains to be made from learning effects in further drug discovery, and particularly in marketing skills for the sale of generic2 drugs in domestic networks with some introduction to global networks, though that trade, when conducted by 1 de la Fuente and Domenech (2002), reviewing recent literature, examine the sources used for human capital coefficients in growth regressions. They point out that there is support for the general impact of human capital in census attainment data and enrolment series, and that improving the quality of the data improves the power of the coefficient. See Psacharopoulos and Arriagada (1986); Kaneko (1986); Kyriacou (1991); Lau, Jamison and Louat (1991); Lau, Bhalla and Louat (1991); Barro and Lee (1991), and others. 2 WT0 (2001): “ Dictionaries tend to define a “generic” as a product – particularly a drug – that does not have a trademark. For example, “paracetamol” is a chemical ingredient that is found in many brand name painkillers and if often sold as a (generic) medicine in its own right, without a brand name. This is generic from a trademark point of view.” 3 local traders, tends to be small and to be limited to countries even further behind in development.3 The paper is divided into four parts. Part I describes the changing pharmaceuticals market, with emphasis on the impact of the shrinking product life cycle and market structure on the spread of the R & D sector in transition and emerging markets. Part II reviews how learning effects are fostered by characteristics of the technology and process management in pharmaceuticals and by linkages through collaboration between researchers and the growing number of firms of smaller sizes.4 Part III estimates direct and indirect indicators from cross country comparisons of interaction effects between overseas pharmaceuticals markets and learning capacity. Part IV summarizes the results and concludes the paper. PART I. GLOBAL PHARMACEUTICALS MARKETS Whereas the overall impact of spillovers on production of pharmaceuticals in the developing world is considered to be no more than 1 per cent of GDP, given that production is concentrated in a few developed countries, with the US dominating, in transition economies, we estimate a far greater gain through new concentration and new benefits for small entrepreneurship—the weak point of the former Communist economies—helping the competitiveness of the whole economy. Roughly, Table I shows the general grouping of relevant countries in terms of market share. The transition countries emerge as particularly significant among the blocks of nations that have surged forward over the past decades (OECD).5 TABLE I SHARE OF WORLD EXPORTS OF PHARMACEUTICALS: COUNTRIES GROUPED, 1998 Share of Between 0.1 Between 0.5 and 0.7 % Between 0.8 and 3 % Between 4 and 5 Greater than 5 World and 0.4 % % % Exports, 1998 Countries Iceland, Israel, Russian Federation, Netherlands, United Peru, Argentina, Turkey, Italy, Kingdom, Bulgaria, China, Brazil, Switzerland Germany, Chile, Mexico, Portugal, United States Indonesia, Hungary, Canada, Malaysia, South Africa, Poland, 3 For example, beginning in 2000, Brazil and India conducted talks toward cooperative agreements to foster in both countries public private partnerships in pharmaceuticals developments and to enhance reciprocal trade through the WTO. 4 See particularly Gambardella (1995) and Pisano (1996); and also the considerable literature on the geography and economics of innovation. 5 OECD, Foreign Trade by Commodities 1993-1998, Vol. 5, p. 354. 4 Slovenia, Czech Republic Japan, Thailand, Spain Philippines, Venezuela, Columbia, Slovakia, Romania, Baltic States, Tunisia, India, Korea, Singapore Source: UNIDO, Statistical Appendix