The emergence of competence creating subsidiaries in UK pharmaceuticals in the 20th century

ABSTRACT

The evolutionary model of the MNE emphasizes that subsidiary specialization is the consequence of the transition from market- to efficiency-seeking FDI. But over 40% of subsidiaries in UK pharmaceuticals had acquired competence creating mandates by 1963, when market- seeking strategies were universal. The paper finds that none of the determinants of the rise of competence creativity in UK pharmaceuticals in recent years can explain what was at least as significant a rise between 1945 and 1963. The paper concludes that the evolution of competence creating subsidiaries is probably more dependent on subsidiary manager agency and path dependency that commonly allowed.

Word count (not including abstract): 13,916.

Keywords: History of FDI and the MNE; Historical Adaptation; Evolution of subsidiaries and headquarters; R&D; Historic FDI in UK pharmaceuticals.

1 What drives creativity? The emergence of competence creating subsidiaries in UK pharmaceuticals in the 20th century.

Introduction: From market-seeking to efficiency-seeking FDI and the emergence of competence creating subsidiaries.

One of the most significant developments in the last twenty years or more of scholarship in international business has been the recognition of how the overarching purpose of foreign direct investment (FDI) by multinational enterprises (MNEs) has switched from being market-seeking to efficiency-seeking, which has transformed the understanding of the role of subsidiaries and the organizational structures of MNEs (Dunning and Lundan, 2008, e.g. p. 190).1 In the earlier market-seeking stage of MNE evolution, MNEs typically had multi-domestic structures, where the ‘parent firm undertakes the first stage of production, for example, the R&D and design work for each of their products in the home country’, and then manufactures overseas (Dunning and Lundan 2008, p. 209 and fig. 7.1). The most explicit statement regarding the relative inferiority of subsidiary status in new product development came through Vernon’s product cycle theory, where subsidiary R&D was deemed unimportant and qualitatively restricted to adapting products for local markets (Vernon 1966). The Uppsala stage theory also assumes that ‘knowledge creation in foreign markets occurs at a late stage’ (Cantwell and Mudambi 2004, p. 40, Johansen and Vahnle 1977).

The switch to efficiency-seeking strategies was associated first, with much greater levels of FDI around the world, and then second, far greater specialization among subsidiaries as they utilized the endowments of their host economies. The subsidiaries best placed to exploit the most valuable knowledge-intensive local endowments were research and development (R&D) facilities, and so, in accordance with this emerging body of theory, the shift to efficiency-seeking investment has led both to a growing geographic dispersal of R&D functions generally, and the growing likelihood that some overseas R&D subsidiaries acquire sufficient capabilities that they are able to acquire greater levels of responsibility for product innovation from the parent company. From the late 1970s foreign affiliate expenditure on R&D increased rapidly, first in the US and then in Europe (Dunning and Narula 1995, Holm and Pederson 2000). The idea of the world product mandate, or competence creation mandate2, began to take shape in the early 1980s among a few leading MNEs (Dunning and Lundan 2008 p. 738, Dunning and Narula 1995 p. 69, Pearce and Papanastassiou 2009, Cantwell and Mudambi 2005), where those few subsidiaries that had displayed sufficient competence were given a charter to contribute to parent company strategic innovation.

2 By the end of the 1980s the globalization of R&D had become an unmistakeable aspect of this evolving strategic behavior (Feinberg and Gupta 2004). It is difficult to overemphasize its significance for the prevailing understanding of the role of MNEs in the world economy. A market-seeking environment understands MNEs essentially as institutions responsible for the transfer of certain kinds of technology, technology sufficiently complex or tacit that other forms of internationalization (such as licensing) failed (Buckley and Casson 1976). The current model, by contrast, no longer sees an MNE as a fairly passive child of market failure, but rather as a far more dynamic organization, increasingly able to combine parent company innovations with those emerging in different subsidiaries to produce wholly new and better products and services that can be sold in ever more locations around the world (Cantwell, 1995; Cantwell and Piscitello, 1999; Cantwell and Janne, 1999; Pearce, 1999).

As the transition from market-seeking to efficiency-seeking FDI has transformed the role of the subsidiary, so correspondingly it has also been the catalyst for a change in the structure of the MNE. Outside a few pioneers, multi-domestic or ethnocentric organisations were universal and, moreover, in a market-seeking environment subsidiaries were able to operate under some considerable autonomy with ‘minimal parental interference’ (Dunning and Lundan 2008, p. 187). After all their primary function was simply to place a given product into the host market. By contrast, in an efficiency-seeking environment, parents have to reconfigure the entire multinational organisation away from a series of dyadic HQ- subsidiary relationships into an increasingly differentiated network. Here the flows of knowledge are no longer necessarily from the centre to subsidiaries, but increasingly from subsidiaries to all other nodes on the network (Kuemmerle, 1999; Nohria and Ghoshal, 1994; Birkinshaw and Hood, 1998). By the early 2000s the large MNE was ‘evolving into… the role of an orchestrator of production… the decision-making nexus of the MNE has come to resemble the central nervous system of a much larger group of interdependent… activities’ (Dunning and Lundan, 2008, p. 739). The imperative for better internal co-ordination of resources and information has prompted many MNEs to become polycentric or geocentric organisations (Hedlund 1986).

Underpinning this explanation of the specialization and orchestration of subsidiary R&D activities around the world was a renewed emphasis on the importance of location advantages. Efficiency-seeking MNEs became increasingly aware of the potential advantages for new technology creation available to them in different locations around the world (Dunning 1998, Cantwell 2009), so encouraging subsidiaries to adapt, ‘tapping into local sources of competence’ (Ensign, Birkinshaw and Frost 2000, p. 149-50).

The central tenets of the evolutionary model of the MNE can thus be summarized as follows: a shift from market- to efficiency-seeking investment strategies precipitated a move to a much greater level of FDI

3 overall, with vastly increased specialization among subsidiaries, the most important of which was the emergence of competence creating subsidiaries. The increased specialization of subsidiaries and, for some, their growing contribution to parent new product development, in turn co- evolved with the emergence of new organizational forms, notably the move from ethnocentric to geocentric structures. The shift from market- to efficiency-seeking strategies is thus central to understanding the emergence of the modern MNE.

This shift can in turn be explained by the change in the wider global economic environment, where a series of institutional changes introduced the liberal world trade order increasingly from the late 1960s onwards which had the effect of increasing competition. This was made ‘possible by the reduction of barriers to trade between countries’ (Dunning and Lundan, 2008, p. 192). Pearce and Papanastassiou (2009) are even more explicit about this historical process. The multidomestic hierarchy with its centralization of R&D emerged because of tariffs and other restraints on trade from the 1930s onwards, reaching its ‚apotheosis… in perhaps the mid-1960s‛ (p. 5), and it was only after that subsidiary specialization began.

The key historical event here was the Kennedy Round of General Agreement on Tariffs and Trade (GATT), which began in 1964 and was the first multilateral trade agreement to remove any trade barriers after World War Two. The 1967 Kennedy Agreement was supported by other, near contemporaneous but less significant events (the European Economic Community formed a partial free-trade area among six nations in 1958, for instance), and was ultimately superceded by the more far-reaching removal of trade barriers in GATT’s Tokyo Round from 1980. But the opening of the Kennedy Round discussions meant that 1964 was when the era of de- globalisation began to draw to a close (Jones, 2005). So with the increasing removal of trade barriers initially after 1967, and then more clearly from 1980, global competition increased.

There has emerged therefore a consensus that the evolution of the MNE in the last thirty to forty years ,with its associated increase in the scale and specialization of subsidiary activities, and all co-ordinated by a geocentric organizational structure, has been driven by increasing levels of international competition. And while no single indicator of levels of competition exists that would cover such a global transformation of international business, the conventional proxy of looking at trends in international trade (as an indicator of an economy’s relative openness to international competition [Cantwell and Piscitello 2010]) gives empirical support to the association (WTO 2010, UN 1960). Moreover, substantial supporting evidence is found in the literature on subsidiary evolution, where survey respondents, for example, support the association of the emergence of subsidiary mandates with increased competition, the need to maintain competitive advantage, and so the importance of tapping into local sources of knowledge and benefiting from spillovers.

4

Increasing global competition led to the emergence of integrated MNEs, which in turn enabled some subsidiaries to exploit their location’s comparative advantage in knowledge creation and emerge with competence creating mandates for their R&D activities (Cantwell and Mudambi, 2005, Table 2; Dunning and Lundan, 2008; Wilkins, 1970 and 1974). The evolutionary model has not yet reached the point where the relative contributions of changes in competiton, emerging organizational forms, and developing location advantages can be separately analyzed. But as this introduction has indicated, levels of competition do emerge as the principal determinant, and these in turn are largely determined by governance structures and tariff and non-tariff restrictions to international trade. Given that the world economy has moved from positions of being more or less liberal over the course of the twentieth century, it is reasonable to expect that the move towards efficiency seeking FDI and corresponding subsidiary specialization seen in recent years might be mirrored earlier in the century, before retrenchment prompted MNEs to move to market-seeking FDI and so away from subsidiary specialization from the 1930s to the early 1960s.

Of course it is important to be clear at the outset that competence creating- type innovativeness among subsidiaries does have a long history. There have been several notable episodes of subsidiaries developing crucially important innovations for the subsequent life cycle of the parent company. Singer’s dominance of the global sewing machine industry came from the creation of a novel sales system developed in its UK sales subsidiary. Shell was notable for relying on R&D that emerged from its US subsidiary. And it was the German subsidiaries of GM and Ford that first developed effective ‘compact’ models in the 1970s, for instance, to take only three of the most obvious examples (Godley, 2006; Casson and Godley, 2007; Köhler, 2010). What is not yet known, however, is whether these were isolated episodes or not, exceptions that proved the rule of competence-exploiting HQ- subsidiary relationships in a de-globalised world.

The empirical data to support the globalization-induced emergence of subsidiaries with competence creating mandates is weighted to surveys of subsidiaries in the North America, UK and Scandinavia in the 1990s (Mudambi, 1999; Pearce and Papanastassiou 2009; Ensign, Birkinshaw and Frost 2000; Davis 2000; Iwasa and Odagiri 2004). These surveys clearly show the anticipated specialization among subsidiaries and the acquisition among a minority of a competence creating or product mandate. Pearce and Papanastassiou have largely focused on conceptualising a range of product mandates, and their results show that large minorities of subsidiaries emerged with relatively weak mandates (where the subsidiary’s contribution to parent company product innovation was significant but relatively minor), and correspondingly smaller minorities with strong mandates. Further investment and development may, for an even smaller minority, lead to a more elevated status of Centre of

5 Excellence (Ensign, Birkinshaw and Frost 2000, Holm and Pedersen 2000). But such development is incremental and path dependent, building on the base of a subsidiary having earlier acquired some minimal level of competence creativity. The critical transition is therefore that from competence exploiting to competence creating status.

In the recent studies respondents universally indicated that the process of R&D specialization was increasing, thus giving some support to their contention that this was a historical process. In fact, further support emerges from surveys of historical inward direct investment in British manufacturing, notably from Bostock and Jones’ (1994) work (which itself built on Dunning, 1958 – see Appendix). This comprehensive survey of overseas entrants in British manufacturing showed that possessing any kind of R&D function among subsidiaries in British mechanical and electronic engineering was a rarity. In 1935, for example, only 11 out of 97 engineering subsidiaries had any kind of R&D activity in the UK, and none were engaged in anything other than adapting parent company technologies for the British market. Bostock and Jones’ data show a big increase in inward FDI into British engineering by 1963. But despite this increase in volume, there is no evidence of any increases either in the share of subsidiaries engaged in R&D, or any change in the nature of that subsidiary R&D. Among subsidiaries of foreign MNEs in UK engineering in 1963 R&D remained universally adaptive, in contrast to the 1980s and 1990s (Bostock and Jones, 1994; Appendix).

A further test of this apparent absence among subsidiaries in British engineering of any with sufficient creativity to be thought of as analogous to possessing a competence creating mandate comes from examining historic US patent data, compiled by NBER economists (Hall, Jaffe, and Trajtenberg, 2001). This source lists all patents granted in the US by company name from 1963 onwards. Not one single UK engineering subsidiary had a US patent assigned to it between 1963 and 1969, confirming that R&D activities among subsidiaries in UK engineering remained universally competence exploiting. By contrast by the early 1990s, Cantwell and Mudambi (2005) showed that 24% of subsidiaries in UK engineering had acquired US patents, so providing their empirical proof of the increase in the share of competence creating subsidiaries in an era of efficiency-seeking investments and changing organizational forms.

The evolutionary model therefore seems broadly to be supported by both global data and a simple examination of longitudinal trends in patenting among one relevant population of subsidiaries. But before this can be accepted as the standard explanation of the evolution of subsidiary R&D creativity, further tests are surely necessary. One obvious yet simple test would be to perform the same historical survey of UK subsidiary R&D activity but in a different sector. If the central propositions – that increasing global competition, the diffusion of geocentric structures, and the emergence of relevant location advantages were the determinants of

6 the emergence of competence creating mandates in the most advantageous locations – are valid, then they must either be valid in all cases or otherwise qualified. This paper therefore concentrates on patterns of R&D activities among subsidiaries in the UK over the course of the entire twentieth century, but in pharmaceuticals rather than in engineering. The pharmaceuticals sector has been selected deliberately. Pearce (1999) and Davis (2000) have recently shown that pharmaceuticals subsidiaries were among the most significant sector for subsidiary R&D specialization in the UK and Denmark. It seems reasonable to assume that in pharmaceuticals, the most knowledge-intensive sector of all, any such specialization will have occurred relatively early and so have left the greatest amount of historic evidence from which to draw conclusions.

Competence Creating Subsidiaries in British Pharmaceuticals in the twentieth century – empirical data.

The pharmaceuticals sector internationalised both relatively early and extensively. Remarkable breakthroughs in synthetic chemistry and biologicals in the 1890s allowed German firms to become the global leaders, with Swiss and French firms as followers (Bernschneider-Reif et al, 2002; Burhop, 2009; Kobrak, 2002; Foreman Peck 1995, Quirke 2009). Despite important advances among US and UK firms, the Germans, Swiss and French retained their technological lead through the 1930s and up to World War Two (Cantwell 1991; Corley, 2003; Corley and Godley, 2011; Slinn 2008; Quirke and Slinn 2010). That war acted as an enormous catalyst for technological development in the sector, with the leading US firms developing significant advantages in pharmaceutical manufacturing, the profits of which were ploughed back into R&D. Combined with the decimation of the German and French industries, this provided the platform for the internationalisation of the US industry in the 1950s, 1960s and 1970s (Athreye and Godley, 2009). By the 1970s foreign (largely US) MNEs dominated UK pharmaceutical output (Corley, 2003). During the 1980s and 1990s the increasing costs of R&D caused substantial restructuring, which in turn prompted dramatic growth in the amount of R&D conducted in UK pharmaceuticals overall, rising from £22 million in 1970 to £2,000 million in 1995, a more than tenfold real increase in expenditure. By the end of the 20th century the UK was clearly at the forefront of global pharmaceuticals R&D (ABPI 1992 and 2000).3 Despite the presence of some prominent indigenous firms, this increasing R&D focus in the UK pharmaceuticals was largely the outcome of efforts by the subsidiaries of foreign MNEs. There are sadly, however, no official or industry-level data that distinguish between indigenous and subsidiary unit R&D activities for the twentieth century (Corley 2003: 27).

In the absence of any reliable industry-wide sources, data on subsidiary level R&D activities here have been drawn from two sources. The most recent observations are drawn from a survey of subsidiaries’ R&D activities

7 (including UK pharmaceuticals) conducted in 1994 by Robert Pearce and Marina Papanastassiou (Pearce 1999; Pearce and Papanastassiou, 2009). Following the current convention among international business scholars (e.g. Rangan and Sengul, 2009), 1994 is considered to be sufficiently close to the end of the 20th century as to accurately capture the trends in creativity among subsidiaries in UK pharmaceuticals in the most recent period of reglobalisation to the present. For the earlier observations, data is drawn from the a series of projects by John Dunning, Geoffrey Jones and Andrew Godley on the historic population of subsidiaries of foreign multinationals in the UK, including pharmaceuticals (Bostock and Jones, 1994; Dunning, 1958; Godley, 1999; Godley, 2000; Godley, 2003; Jones and Bostock, 1996).

These successive research projects were mostly funded by successive grants from the UK Economic and Social Research Council, and so the resulting dataset has been through successive peer review scrutiny and post-award evaluation processes. Furthermore a succession of articles have been published in highly ranked journals (e.g. see Bostock and Jones 1994; Godley 2003), and the outcomes have been widely cited (e.g. Wilkins 2009, Dunning and Lundan 2008, Godley and Casson 2010). While none of the dataset authors argue that the historic populations of subsidiaries are complete, they do claim that any omissions are essentially insignificant. The population of historic subsidiaries is therefore sufficiently complete that any results from its analysis ought to be considered reliable. Indeed, when compared with more recent survey data, arising from response rates varying around the 30 percent level, there is a strong basis for presuming that the results from the historic population are likely to be inherently more reliable than the contemporary data.4 This does not mean that the historic dataset is perfect. While for many of the most important variables the historic data are comprehensive and robust, for some desirable variables – unit-level annual expenditure on R&D, for example - no data exist. Nevertheless the historic dataset offers easily sufficient evidence to subject the long term relationship between the emergence of competence creating subsidiaries and changes in the levels of competition, in the MNE organizational form, and in location advantages in host economies, to far greater scrutiny than has hitherto been the case. The analysis below follows a series of pair-wise comparisons of each of the proposed drivers of the change in subsidiary behavior and the changes in the share of competence creating subsidiaries in UK pharmaceuticals over the period.

Proposition One. Comparing the Emergence of Competence Creating Subsidiaries and levels of Competition in UK Pharmaceuticals in the Twentieth Century

The shift from market- to efficiency-seeking behavior of MNEs is in its simplest form largely explained by increasing levels of competition. The evolutionary model of the MNE is therefore essentially Darwinian, with

8 the forces of competition driving change. Empirical data apparently strongly support the association of increased competition leading to increasing levels of competence creativity among UK pharmaceuticals subsidiaries in recent years. By the 1990s Pearce reports that 80 percent of pharmaceuticals R&D subsidiaries were in both large and small ways contributing to parent company product development (Pearce 1999, pp 164-5, n. 26).

For the historic population of pharmaceuticals subsidiaries it is known that from 1907 onwards all pharmaceutical production subsidiaries in the UK needed invest in laboratory capacity to enable them to comply with basic quality control requirements; they all therefore conducted adaptive R&D from that point on. Assessments as to whether any subsidiary R&D contributed to new product development have been done initially through a close reading of the relevant business history and history of science literatures (see Appendix for sources). This represents an enormous body of relevant documentary material. There is no a priori reason why self- reporting survey data might lead to more or less exaggerated claims for subsidiary R&D significance than in the historic sources. In the end, as Cantwell and Mudambi make clear, assessing whether any specific subsidiary has acquired a competence creating mandate is essentially a judgment based on empirical information. But judgment needs to be verified. In the absence of a fully comprehensive historical record of all subsidiaries, the NBER database of historic patents has been consulted again (as with the comparison of historic subsidiaries in engineering above) in order to obtain some base measure of R&D creativity among the subsidiaries in British pharmaceuticals in 1963. Evidence of registering a US patent by a UK subsidiary provides the verification of at the very least the acquisition of a minimal threshold of R&D creativity to suggest that the unit was not simply a competence exploiting subsidiary.5

Method The initial proposition being investigated here is whether there was the expected positive correlation between changes in the share of the population of subsidiaries that had acquired competence creating type levels of R&D creativity and changes in the level of competition in the UK pharmaceuticals sector. At a global level the literature strongly associates these two phenomena, and further associates changes in the levels of competition with changes in the governance of international trade; increased liberalization leads to increased competition. Of course there were other determinants of levels of international trade, changes in the costs of transport being only the most obvious, but governance regimes are widely seen as the most important. The direction of change in liberalization has varied, breaking the 20th century into sub-periods according to the prevailing governance structure of international trade (Jones 2005).

9 Because the institutional structure of international trade, and hence international competition, differed so markedly from one sub-period to another, the most appropriate method is to treat each sub-period as a discrete event. Thus the method adopted here has been to conduct a series of event studies and to see whether the actual behavior of pharmaceutical subsidiaries was consistent with that expected over each successive event. The benefit of conducting repeated event studies according to Morck and Yeung, is that they are then ‘perhaps the most direct test of causality’ (2011, p. 48). A high, expected correlation between the ex ante predicted and the observed outcomes over successive events is strong evidence from which to infer causality.

Event studies have been used frequently by financial economists eager to understand investor expectations of firm value with respect to announcements about mergers and acquisitions, or legislative changes, or other events that might be supposed to have an impact on the value of the firm (Warren-Boulton and Dalkir 2001). The logic relevant to the current application is that if, as recent survey evidence indicates, MNE managers believe that the competitive environment will influence subsidiary specialization, and that changes in the global governance of international trade influence international competitiveness, then it follows that MNE managers would have been more likely to pursue strategies that would have led to an increase in the share of competence creating subsidiaries after an announcement of a global commitment to increased liberalization of world markets, and vice versa.

Financial economists wanting to examine the impact of some announcement on the value of a firm typically calculate the ex ante probability of an event associated price change and then compare this with the observed outcome. Given the current generality of the evolutionary model of the MNE and the responsiveness of MNE structures to competition, it would not be possible credibly to estimate any ex ante probabilities with any precision. But estimating the likely direction of change in subsidiary behavior under different conditions of competitiveness and comparing these with the actual outcomes during the different event windows is entirely reasonable. First, therefore it is important to get some credible index of competitiveness in UK pharmaceuticals over the course of the twentieth century and so identify the start and end points of each event window.

Drawing on the earlier discussion of the close correspondence between levels of openness and competition in an economy, perhaps the best single index of competition in UK pharmaceuticals would be to examine trends in UK pharmaceuticals trade. Tariff and non-tariff barriers have operated in UK and global pharmaceuticals at different times and at different levels of exclusion, so impacting levels of competition in the UK sector. Table 1 suggests that the UK pharmaceuticals sector was highly competitive both before and immediately World War 1, with levels of openness higher then

10 than at any time before or since. War time constraints led to much reduced openness between 1914-1918, and 1939-1945, but openness fell also between 1919-1929, and further between 1929-1939, the classic era of Depression and autarchy. The pharmaceuticals industry data show that outside the Great Depression and war, the forces of competition were at their most attenuated around 1960. This is consistent with the controversies surrounding the issue of ‘monopoly profits’ in the pharmaceuticals industry that erupted in the US and UK at that time (the Kefauver Senate hearings 1959-1963, and the UK Government’s Sainsbury Committee, 1965-1966). Levels of competition slowly increased by 1970, before subsequently accelerating to approach pre-World War 1 levels by 1990 (see Appendix Table A3).

As far as the UK pharmaceutical sector is concerned, it is therefore possible to divide the twentieth century into five separate sub-periods, or windows, each one differentiated both from the preceding and succeeding window in terms of trends in openness, or some major dislocation. Table 1 lists the twentieth century sub-periods in chronological order, highlighting the trends in openness in the pharmaceutical sector during the sub-period, and then the expected change in the share of competence creating subsidiaries in the period. The table then goes on to show the actual outcomes (Column 4).

The series of event studies in Table 1 show that in only one of the five sub- periods of the twentieth century is the actual outcome consistent with that expected; the most recent period leading up to the present. Here levels of openness increased, implying that competition increased, and the share of competence creating subsidiaries in the UK pharmaceuticals sector also increased from 41% to 80%, a net increase of 39% over approximately 30 years. For the earlier periods the correlation between the expected and actual outcomes are either insignificant, or are opposite to the expected direction. The 1920s saw a reduction in the level of openness but an increase in the number of competence creating subsidiaries from zero to one (Boots had been acquired by United Drug). Openness further declined in the 1930s, while the number of competence creating subsidiaries remained static (United Drug sold Boots, but Rhone Poulenc acquired May and Baker). With an increase in the number of competence exploiting subsidiaries in the 1930s, this led to a fall in the share of competence creating out of all subsidiaries (from 5% to 3%). But not too much emphasis should be placed on these early trends given the small numbers involved. The period 1945 to 1963 cannot be discounted on the basis of low numbers, however. Here the level of openness declined, implying that levels of competition decreased, but the share of competence creating subsidiaries increased from 3% to 41% (or 29 out of 70 subsidiaries), a net increase of 38% over less than twenty years, or a faster rate of increase than in the more recent period.

11

Given the changes in the underlying competitive environment, breaking the century into separate event windows and conducting repeat event studies is the most suitable approach to identifying whether changes in competition caused changes in subsidiary R&D competences. The only possible interpretation of the results is that, in its simplest form, competition does not lead to creativity.6 The crucial event window here is that from 1945 to 1963, because this sub-period saw such a large number of subsidiaries acquire competence creating mandates, yet was the period when the forces of competition in UK pharmaceuticals were diminishing to their weakest peacetime level.7

While the evolutionary model does suggest that the forces of competition are the principal determinants of change, the scholarly literature overwhelmingly conflates competition with other factors influencing subsidiary evolution, notably changing organizational structures and the emergence of significant location advantages. These two propositions are explored in the following two sections. As the number of competence creating subsidiaries in UK pharmaceuticals before 1945 were so few, the rest of the paper focuses on the two post-1945 event windows, 1945-1963 and 1963 to 1994.

Proposition Two. Comparing the Emergence of Competence Creating Subsidiaries and Geocentric Organisational Structures in UK Pharmaceuticals, 1945 to 1994.

The existing literature on network structures and geocentric organizational forms in MNEs identified this as an emerging feature in the 1970s and 1980s, strongly associating such a transition with the increasing forces of competition unleashed through greater trade liberalization.

‘Finally, the institutions of the world economy are inexorably moving towards increasing the level of competition… As trade barriers are rolled back, MNEs find that their former ‘profit sanctuaries’ are no longer secure and many of their cross- subsidization based advantages have been dissipated. Increased competition and falling rates of return on their traditional activities have forced MNEs to ratchet up their offerings. Thus, forces of demand, supply and institutional change have all pushed MNEs towards becoming more decentralized knowledge management systems.’ (Cantwell and Mudambi 2004, pp. 41-2)

The structures of those decentralized knowledge systems have varied. In the early contributions the argument was largely that the emerging network systems were more superior than other forms (Hedlund 1986, Bartlett and Ghoshal 1989, Doz et al 2001, Kogut & Zander 1993). Later contributions began to identify variations of the new network structures sometimes as a management tool (Nohria and Ghoshal 1994), or as an

12 analytical tool (Forgren, Holm and Johanson 2005). The first approach emphasizes the ability to transfer knowledge between units inside the MNE rather than the ability to acquire knowledge from the environment. The second deals more with the creation of a personal network as an efficient management tool besides the ones that traditional contingency theory offers. While the third approach deals more with external and corporate business relationships as important characteristics of every MNE. Regardless of the exact type of organizational structure, Feinberg and Gupta insist that the key function of the organizational structure that leads to the probability of a subsidiary being assigned a competence creating mandate ‘depends critically on the extent to which its parent MNC has put in place structures and routines to transfer and use globally sourced knowledge’ (Feinberg and Gupta 2004, p. 825).

Given that creativity emerged so markedly among UK pharmaceutical subsidiaries prior to 1964, if the evolutionary model is valid, it seems reasonable to expect some significant association with a move away from ethnocentrism to either greater knowledge sharing among subsidiaries belonging to the same parent, or to some increased absorptive capacity between subsidiaries and parents in that period (Cohen and Levinthal 1990). Tables 2 and 3 cast some doubt on these presumed relationships for the population of those subsidiaries which had acquired competence creating status before 1964, however.

Table 2 lists those parent MNEs that had competence creating subsidiaries in UK pharmaceuticals by 1963 along with the total number of their manufacturing subsidiaries worldwide. The mean number of overseas manufacturing subsidiaries was precisely six. In the empirical underpinning of the early literature on network organization among MNEs the typical number of production subsidiaries is many dozens (e.g. Ghoshal and Bartlett 1990, Fig. 1, p. 605). There is a threshold number of subsidiaries below which the organizational costs of moving to a network form make it uneconomic to do so. There is no definitive answer in the literature as to what that threshold figure might be, although it is clearly more than six. Closer examination of the Table reveals that the three parents with the greatest number of production subsidiaries worldwide were Pfizer, AHP and Merck. If the strategic shift to structures and routines to facilitate knowledge sharing among subsidiaries or between parents and subsidiaries led to the emergence of competence creating subsidiaries in UK pharmaceuticals before 1963, then it seems reasonable to assume that such a move would have taken place among these firms first. Yet the corporate histories are conclusive in suggesting that these subsidiaries were ‘generally unfocussed’ , or ‘autonomous’ (Rodengren 1999, Connor 1991, p. 18, Mahoney, 1959, p. 39).8

13

The association of the move to geocentric structures and the emergence of competence creating subsidiaries, which is such a strong feature in the literature relating to the recent period, was unimportant during the period 1945 to 1963. The largest pharmaceutical MNEs pursued little co- ordination of their subsidiaries. Discount these three parents and the seventeen remaining MNEs had a mean of less than four production subsidiaries worldwide, including those in the UK. There was no benefit to moving away from the multidomestic structure in these still relatively undeveloped MNEs.

Underpinning the association of geocentric structures with competence creating subsidiaries is the recognition that for subsidiaries to become more creative, the new knowledge has to be shared and recombined with other subsidiaries and the parent. Pearce’s survey of pharmaceutical subsidiaries confirms that this is a particularly important driver of subsidiary creativity among the pharmaceuticals respondents today (Pearce, 1999, Tables 4 and 5). Given the relative underdevelopment of network forms before 1963, perhaps knowledge-sharing between subsidiaries and parents took place within the traditional multidomestic structures.

There are some examples of complementary research paths taken by parent and UK subsidiary units by 1963 (Slinn, 2008; Petrow and Hartley, 1996; and Mantle, 1994 on Parke Davis, Mead Johnson and Pfizer respectively, for example). But a more systematic analysis of patent evidence suggests, however, that these were very occasional occurrences. Table 3 shows that only one US patent out of 103 registered there to the UK pharmaceuticals subsidiaries of MNEs was co-authored by scientists at both the UK subsidiary and at the parent company. No co-authors were employed at any other sister subsidiaries. Indeed only three co-authors from the entire population of 249 co-authors were employed outside the subsidiary to which the patent was assigned; 99% of all authors were employees of the subsidiary sponsoring the research. Subsidiary autonomy reigned supreme before 1964.

Proposition Three. Comparing The Emergence of Competence Creating Subsidiaries in UK Pharmaceuticals and the Rise of Location Advantages in the UK, 1945 to 1994.

The third broad proposition in the literature identifies an association between the emergence of competence creating subsidiaries and the co- evolution of significant advantages in the knowledge creation activities in the subsidiary location. A large literature examines how subsidiaries are able to identify locations where they may access the spillovers from

14 knowledge creation activities. Athreye and Godley (2009) building on Mathews (2002) suggest that targeting strategic asset seeking FDI into R&D intensive locations may even yield sufficient spillover gains to enable a firm to leapfrog the technological capabilities of others, for example. Feinberg and Gupta suggest that the scale of R&D overall and its relative dispersion across the industry represent the key indicators of whether any potential entrant might be able to capture such spillovers in any given location.

If we are to explain this surprising emergence of such a large share of pharmaceuticals subsidiaries with competence creating mandates before 1964 by a transformation in the location advantages of pharmaceutical R&D in the UK, then, following Feinberg and Gupta, there should be ample evidence of a major growth in R&D expenditure and across a sufficiently large number of firms there. In the more recent period the growth in R&D expenditure in UK pharmaceuticals has, as already noted, been pronounced. In 1980 R&D expenditure amounted to 10.3 percent of UK gross output of pharmaceuticals, rising to 16.1 percent by 1990, spread across 370 firms (ABPI 1992, p. 1 and Table 22). The UK’s relative location advantage had materially improved over the period since 1980 at the latest.

Given that the rise in the share of competence creating subsidiaries was at least as impressive from 1945 to 1963 as after, some similar increase in the magnitude of R&D expenditure ought to be expected. The consensus view of historians of the UK pharmaceutical industry is, however, that the emergence of significant technological capabilities in the UK overwhelmingly took place after 1963, not before (Slinn 2008, Quirke and Slinn 2010). Before World War Two R&D effort in UK pharmaceuticals was primitive. Outside the UK subsidiary of Rhone Poulenc, May and Baker, patenting was almost insignificant. Over the six years from 1936 to 1941 Glaxo registered 13 patents, Boots 12, British Drug Houses 7 and Burroughs Wellcome 6, or between one and two per annum (Slinn 2008, p. 192). This reflected low levels of investment in R&D. Despite major changes in the scale and organisation of UK pharmaceuticals R&D over the war and into the 1950s, total expenditure on R&D only attained 2.4 percent of gross output by 1953, and then rose slowly to 3.8 percent by 1960, rising further to 4.2 percent by 1965. Given that this included the efforts of the subsidiaries of all the recently arrived overseas entrants, most of this growth was unlikely to have come from indigenous UK firms (ABPI 1992, Table 22). Perhaps unsurprisingly patenting levels among the indigenous UK firms remained relatively low, only reaching somewhere around one tenth of the levels of the large US firms (Slinn 2008). Such statistics go some way to explaining why Cantwell found the UK to possess no revealed technological advantage in pharmaceuticals before the 1980s (Cantwell 1991).

15 If the scale and productivity of local UK pharmaceutical R&D activities appears to have been an unlikely candidate as determinant of the large increase in subsidiary R&D creativity before 1964, perhaps other location advantages can be inferred from subsidiary behavior. A strong feature of the literature is an emphasis on the significance of sources of tacit knowledge in determining whether a subsidiary acquires competence creating status (Pearce and Papanastassiou 2009, Feinberg and Gupta 2004, Birkinshaw and Hood 1998). Because the comparative advantage of a location may not be immediately obvious where R&D success depends on tacit knowledge, so any investigation of its potential must lead to trial-and- error experimentation. Competence creating mandates can therefore emerge only after a period of experimentation, hence those subsidiaries are necessarily older than competence exploiting. The trial-and-error process is necessary because the parent is interested in augmenting its knowledge asset base, requiring subsidiaries to select from the range of available parent company technologies those that might potentially best fit the local scientific specialisation. Compared with competence exploiting subsidiaries’ simple adaptations of a smaller range of relatively mature parent technologies, the competence creating subsidiary pursues R&D that complements both a greater range of parent company assets, and tries to augment relatively emergent technologies. Successful trial-and-error matching of parent company and locally-based knowledge capabilities is dependent on successful intermediation and information exchange. Such transactions are too complex for market exchange and so are dependent on person-to-person communication, hence success depends on subsidiary embeddedness in local scientific communities (David, 2004).

The logic here is clear and substantial supporting evidence exists for recent years (Birkinshaw and Hood, 1998; Cantwell and Mudambi, 2005; Pearce and Papanastassiou, 2009). But what about for the earlier period? If the location advantage to pharmaceuticals subsidiaries in the UK was that some sort of early stage tacit knowledge was emerging there, in a form not picked up in trends in industry-wide R&D or patenting statistics, while such knowledge is not directly measureable, it should be possible to identify pathologies associated with such activities. For example, if during the period 1945 to 1963 the principal determinant of the increase in creativity was the local emergence of new tacit knowledge, then it is reasonable to suppose that among the population of subsidiaries present, those that had successfully tapped into the local tacit knowledge had, on balance, made more attempts to match local with parent knowledge capabilities. If so, it is reasonable to presume that those that had successfully acquired competence creating status would be older than those that had not. Equally, repeated trial and error interactions with sources of local tacit knowledge would also lead to competence creating subsidiaries becoming more embedded than competence exploiting ones. The evidence in Chart 1 and Table 4 suggest, however, that there is no support for either of these possibilities for the period from 1945 to 1963.

16 In 1994 the competence creating subsidiaries in UK pharmaceuticals were longer established than the competence exploiting ones (Pearce, 1999; Pearce and Papanastassiou, 2009). Chart 1 shows the distribution of the two types of subsidiary in 1963 by year of entry. The mean age of subsidiary among those with a competence creating mandate in the 1963 benchmark population was 15.2 years (standard deviation of 16.1). The mean age among the competence exploiting subsidiaries was 20.7 years (standard deviation of 29.3). The headline result is that competence creating subsidiaries were younger, not older, than the competence exploiting subsidiaries in 1963. Evidently the two populations of competence creating subsidiaries over the two sub-periods displayed different sensitivity to maturity. In a word, age mattered less in 1945 to 1963.

Conceptually and empirically one of the strongest associations is between the emergence of R&D creativity and subsidiaries’ embeddedness in the local environment, and so able to exploit the local technological capabilities (Criscuolo and Narula, 2005 for example). For the pharmaceuticals sector in the UK, Pearce and Papanastassiou’s survey evidence strongly supports this interpretation of the high levels of R&D creativity they observed, with the pharmaceutical sector respondents far more aware of the location advantages than those from other sectors (Pearce 1999, Table 6). Table 4 reports by contrast that for the 1945 to 1963 population the advantages of embeddedness appear to have been far less significant. There were no examples of host university or public laboratory and subsidiary collaboration mentioned in the corporate histories, for example. More systematic analysis of the US historic patent database reveals that out of the 103 US patents that were assigned to UK pharmaceuticals subsidiaries during the period, representing a total population of 249 patent authors, not one co-author was employed at a British university or public laboratory. Furthermore, there were no co- authors employed at other private sector laboratories in the UK. Rather the locations and the employers of the patent authors indicate that there was simply no collaborative research taking place at all. Competence creating and competence exploiting subsidiaries were equally un-embedded. With almost no exception patent authors were employees of the firms to which the rights were assigned.

An alternative strategic response to the growing importance of local tacit knowledge would be for parent MNEs to buy it. In which case those subsidiaries that had successfully acquired competence creating mandates by 1963 would be more likely to be acquisitions than greenfield ventures compared with the competence exploiting subsidiaries.

17

Table 5 illustrates that evidence of entry strategies also runs counter to that predicted, with competence exploiting subsidiaries somewhat more likely to have entered via acquisition strategies, 40.0% compared with only 37.9% among competence creating subsidiaries. This contrasts once again with the results from the pharmaceuticals industry for the 1990s, where competence creating subsidiaries were more likely to have entered through acquisition than competence exploiting subsidiaries (Pearce and Papanastassiou, 2009). Short cutting the process of acquiring local knowledge and becoming embedded in local institutions mattered less in 1963 than in 1994.

Discussion

The empirical results presented above can be summarised as follows. The emergence of competence creating subsidiaries in the UK pharmaceuticals sector was just as significant in the years from 1945 to 1963 as the years after – the annualised rate of increase in the share of competence creating out of all subsidiaries was greater between 1945 and 1963 compared with 1964 and 1994. Yet despite the survey respondents among the 1994 population of subsidiaries claiming that their R&D creativity and acquisition of a competence creating mandate arose in response to increasing levels of global competition, increasing integration between subsidiary and other nodes on the MNE network form, and increasing links with host economy technological capabilities, there is no evidence to support any similar association with these and the rise of competence creating subsidiaries for 1945 to 1963.

The rise in the share of subsidiaries with competence creating mandates between 1945 and 1963 occurred when the forces of competition were at their weakest. Furthermore the patenting evidence for the 1945 to 1963 period strongly suggests that subsidiary scientists remained essentially autonomous from either parent company or sister subsidiary research efforts. There is very little evidence to support any association of increasing levels of co-ordination of knowledge management, of sharing of learning, or other attributes associated with geocentric structures and competence creation. Nor is there any evidence of any strong location advantages that the competence creating subsidiaries might be tapping into. The patent data show that there was remarkably little local embeddedness, subsidiary scientists simply did not collaborate with host university or public laboratory scientists.

18 In the evolutionary model of the MNE these results make little sense. As outlined earlier, competence creating subsidiaries are a product of the shift to efficiency-seeking investments, where increased levels of competition prompts firms to tap into local sources of capabilities via their subsidiaries, and then to recombine these with parent sources to produce innovation. In the UK pharmaceuticals between 1945 and 1963 there was a rapid increase in competence creating subsidiaries, but none of the presumed drivers were pushing in the same direction.

Of course, the outcome is less implausible once it is recalled that the investments under examination during this period reflected not the efficiency-seeking strategies of later, but market-seeking strategies. Market- seeking investments proliferated in the absence of international openness, required little or no involvement with host economy technological capabilities, and subsidiary autonomy was the norm. In this light the behavior of the subsidiaries in UK pharmaceuticals is quite understandable. But what then becomes difficult to understand is why so many subsidiaries acquired competence creating mandates when parent company strategies were market- and not efficiency-seeking.

The conventional model of market-seeking behavior, whether Vernon’s product cycle logic or Uppsala stage theory, would strongly suggest that subsidiary R&D creativity would be close to non-existent in UK pharmaceuticals before 1963. Yet the empirical data show that this was not the case. Potentially a plausible explanation might be to focus less on drivers from the supply side and more on demand. Demand for new, research intensive pharmaceuticals was increasing in the UK before 1963. Semi autonomous subsidiaries in a market-seeking environment could respond to changing local demand by investing in additional R&D capacity, without necessarily needing recourse to local sources of knowledge. What remains surprising is that so many of these local R&D efforts led to new product developments for the parent companies.

These results are important for developing our understanding of competence creating subsidiaries today. After all this paper has identified that some level of creativity was present among over 40 percent of subsidiaries in the UK pharmaceuticals sector by 1963. Today a greater level of subsidiary creativity is clearly predicated on increasing levels of subsidiary specialisation, on strong relationships between competence creating subsidiaries and local knowledge intensive institutions, and with increasing acceptance among parent companies of the potential competitive advantage of subsidiary contributions to new product development. But the research creativity attained by subsidiaries in the market-seeking environment of the 1950s and 1960s must have emerged from a different set of drivers. This firstly implies that research creativity in MNEs can emerge from different sets (and as yet unidentified sets) of drivers. Secondly it also implies that in the search for greater clarity in the understanding of what has driven the emergence of competence creating

19 subsidiaries today, several of the proximate determinants might profit from more rigorous investigation. If high levels of competition were found to be irrelevant in this earlier emergence of creativity, then perhaps their role in the more recent evolution of subsidiary creativity has been overstated. If the role of competition has been overstated in the more recent stage of the MNE evolution, the implications for the wider political economy of international business might be profound. Thirdly, because initial success in acquiring competence creating mandates is seen as being so influential in determining the acquisition of higher order subsidiary mandates (Ensign, Birkinshaw and Frost, 2000), so the results here imply that other drivers are ultimately responsible for the distribution of R&D specialisms across subsidiaries and locations today. Finally, the results imply that there may in reality have been much less of a dichotomy between market-seeking and efficiency-seeking behavior among MNEs than the current consensus view believes (e.g. Dunning and Lundan 2008).

Conclusion. In the evolutionary model of the MNE, the favoured explanation for the emergence of competence creating subsidiaries links recent events in the global economic environment and the increasing competitive forces unleashed by globalisation to a reconfiguring of the internal organisation of the MNE, and, hence, the greater differentiation across subsidiaries as they utilize local resources. Substantial empirical evidence appears to support this view. The purpose of this paper was to examine whether there was any similar association among subsidiaries over a longer period in the most knowledge-intensive sector, pharmaceuticals, concentrating on the UK. The evidence from this analysis suggests that the globalisation- induced increase in competence creating subsidiaries is an incomplete explanation. It follows that globalisation was not the trigger – direct or indirect - for competence creating subsidiaries. If globalisation was not the trigger, then there is no reason to expect that research creativity be associated with local advantages. Absent competitive forces, there is less pressure on subsidiaries to collaborate with local knowledge sources and so the low level of R&D generally and the absence of collaboration among the 1945 to 1963 population of competence creating subsidiaries is unsurprising.

If the proximate drivers had no influence on the early emergence of creativity, it seems sensible to suggest that recent research effort focusing on better understanding subsidiary creativity processes today focus more directly on the process of subsidiary specialisation and co-evolution itself, before inferring broader determinants. Perhaps more emphasis might be given instead to the agency of individual subsidiary managers acting entrepreneurially to bridge specific knowledge gaps and so gain greater prominence for their subsidiaries’ R&D efforts (Nobel and Birkinshaw, 1998; Bouquet and Birkinshaw, 2008; Hennart, 2009). Or perhaps more

20 attention might be given to the collusive behavior of the MNE parents during the 1945 to 1963 period, collusion which nevertheless had the effect of dispersing R&D specialization (Hymer 1976).

The research presented here has adhered to several prominent international business scholars’ recent requests to combine the modern historical methods used here with grounded theory and an awareness of relevant institutional complexities to produce better history and a challenge to the current explanatory framework of the evolution of subsidiary creativity (Jones and Khanna, 2006; Buckley, 2009; Cantwell et al, 2010; Burgelman, 2011, Cheng et al, 2009). This research is clearly limited. It has focused only on a series of event studies, concentrating only on two. More detailed longitudinal analysis of the relationship between levels of global competition, the diffusion of network structures, local technological comparative advantages and subsidiary research creativity would need to be completed before these presumed relationships can be discounted. But the research reported here does suggest that this would be an important next step.

21 References.

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27 Table 1. Competence Creating Subsidiaries and Competition in British Pharmaceuticals in the twentieth century.

Events Values of UK Predicted Actual Change Correlation Pharmaceutical change in each in share of Coefficient Openness Index event in Competence between at beginning Competence Creating predicted and and end of Creating Mandates in actual events Mandates as Period share of total 1900-1913 <80 to 80  0 to 0  Nil 1919-1929 87.1 to 35.2  0 to 5  Negative 1929-1939 35.2 to 22.5  5 to 3  Nil 1945-1963 29.2 to 27.1  3 to 41  Negative 1963-1994 27.1 to 50.7  41 to 80  Positive

Sources: Appendix, Tables A1 and A2 for Competence Creating Subsidiaries over period from 1900 to 1963. 1994 from Pearce, 1999 – esp. Table 1. Openness Index Appendix Table A3. Note that 1939 is actually 1935/6, 1945 is actually 1950, 1963 is actually 1960, and 1994 is actually 1990.

28

Chart 1. Subsidiaries in UK Pharmaceuticals in 1963 by year of entry (# of Competence-Creating and Competence-Exploiting subsidiaries in 1963 by year of entry)

6 5 4 3 2 1 0 1900 1910 1920 1930 1940 1950 1960 1970

Comp exploiting Comp creating

Source: Appendix, Tables A1 and A2.

29 Table 2. Global Subsidiary Count of Overseas Parents with Competence Creating Subsidiary in UK Pharmaceuticals by 1963 (in order of year of parent’s initial entry into UK)

Parent Subsidiaries in UK in Total Overseas Source reference 1963 Production Subsidiaries in 1963 (inc. UK) Parke Davis Parke Davis ltd 12 Mahoney 1959 p. 79 Roche Hoffman La Roche 2 Peyer 1996 pp. 125- ltd 41 Rhone Poulenc May & Baker 1 Slinn 1984 (M&B) Aspro Nicholas Aspro 8 Smith & Barrie, 1976 Askit pp. 95, 115, 132 Griffiths Hughes Graeser Salicylates AHP Wyeth 14 Mahoney 1959 p. 39 Dodge - conglomerate International Chemical St Jacob’s Oil Bisodol Perox Anadin Boyle Abbott Abbott 5 Abbott, p. 152 Lilly Lilly 7 Mahoney, 1959, p. ELANCO 83, Kahn, 1975 p. DISTA Products 184 Organon Organon 3 Verboeg, 1998 Cyanamid Lederle 10 Mahoney, 1959, p. 10 Roussel UCLAF Roussel Laboratories 5 Quirke, 2008 Roussel Uclaf ltd Squibb Squibb 1 Mahoney, 1959. Upjohn Upjohn 3 Carlisle 1986 pp. 169-70 Pfizer Pfizer 22 Rodengren, 1999, Kemball Bishop Pfizer 1960 – n.b. Exning Biological Rodengren q.v. ‘generally unfocussed’ Bristol Myers Angier Chemicals 2 Mahoney, 1959 Bristol Laboratories Merck Merck, Sharp 13 Connor, 1991 p. 18 – Dohme ‘autonomous’ Morsons overseas. Armour Armour 2 Mahoney 1959 p.154 SKF AJ White 2 Bridge Chemical ASTRA ASTRA 3 Mead Johnson BDH 1 Slinn, Mahoney pp. 153-4 Crookes Philips Duphar n.d. Laboratories Mean number of 6.0

30 global subsidiaries in 1963

31 Table 3. US pharmaceutical patents held by UK competence creating subsidiaries, 1945 to 1963 population.

Integration Co-authors at Co-authors at Co-authors at parent sister other company subsidiary laboratory 1 0 3

Source: Hall, Jaffe and Trajtenberg, 2001. We have adopted the conventional view in the industry, that it requires up to ten years of R&D creative effort before a patent is granted, to determine a cut-off of 31st December 1973 as the latest date of filing for a patent for inclusion in the set (e.g. ABPI, 2009). This gave a total of 103 patents with a gross total of 249 co-authors. Details of individual patents were checked using Google Patents. Authors’ employer affiliations were checked through a variety of directories of chemists (e.g. Royal Society of Chemists, 1970, for university and public laboratory employees) and notably tracing publications (and their associated author affiliations) with Google Scholar.

Table 4. US pharmaceutical patents held by UK competence creating subsidiaries, 1945 to 1963 population – indicators of subsidiary embeddedness in UK economy.

Embeddedness Co-authors at Co-authors at UK university UK private or public sector laboratory laboratory 0 0

Out of total population of 249 co-authors on 103 patents. Source: same as Table 3.

32 Table 5. Subsidiary Type (Competence Creating versus Competence Exploiting) and Mode of Entry among 1945-1963 population of subsidiaries (%)

Competence creating (n = 29) Competence exploiting (n = 40) Greenfield Acquisition Greenfield Acquisition 18 11 24 16 62.1% 37.9% 60.0% 40.0% Source: Appendix. No data for 1 competence exploiting entrant.

33 Appendix: Inward Direct Investment in the UK Pharmaceuticals Industry by Subsidiaries, 1880-1963

Table A. 1. 1880-1939 Subsidiary Parent firm Entry Ho Mo Exit (if CC CC/ Summary of ‘Notes’ in Godley (2000), plus subsequent discovered name name year me de before 1919- Patent additional sources 1963) 39 1945-63 1 Allcock Allcock 1880 US G 1962 ‘Dr Brandreth’s Pills’ Patent medicine Products ltd 2 St Jacob’s Oil St Jacob’s Oil 1888 US G 1913 Patent medicine ltd 3 AJ White ltd AJ White 1897 US G 1905 Medicinal products Corley 1987. See ♯ 65 4 Saccharin Saccharin 1897 F ? 1909 Corp. ltd Corp 5 Parke Davis Parke Davis 1902 US G Y Major R&D labs in Hounslow from 1951 (Deeson, 1995, pp ltd 49-50, Mahoney, 1959, p. 79). 6 British Schering 1907 D G 1916 fine chemicals. See ♯ 76. Schering 7 Meister Hoechst 1909 D ? 1916 chemicals & biologicals novocain & salvarsen Lucius 8 Hoffman La Roche 1909 CH G Y Vitamins, R&D centre in Welwyn from 1938 – (Peyer, 1996, Roche pp 125-41). 9 Merck (E) & E. Merck 1911 D G 1916 fine chemicals, bottling. Co. 10 United Drug United Drug 1912 US G 1923 Corley, 2003. ltd 11 Proprietary Proprietary 1914 US G 1923 Proprietary medicines. Acq by Sterling 1923. Agencies ltd Agencies 12 Chas Phillips Chas Phillips 1914 US G 1923 ‘Milk of Magnesia’ laxative and related products – parent ltd acq by Sterling. 13 CIBA CIBA 1919 CH G Opened laboratory in 1919, but adaptive R&D (Corley, Laboratories 2003). ltd 14 Scott & Household 1919 US A 1923 Prop medicines (Andrew’s powders) – acq by Sterling 1923.

34 Turner ltd Products 15 Lysol ltd Lehn & Fink 1920 US G antiseptic (Lysol) & cosmetics 16 Sandoz ltd Sandoz 1921 CH G Chemicals, fine chemicals & medicines (Corley, 2003) 17 Colgate- Colgate- 1922 US G toothpaste, soap – n.b. subsdiary did develop strong Palmolive Palmolive creativity capabilities in toiletries from 1950s. ltd 18 Kolynos ltd Kolynos 1922 US G 1928 Toothpaste 19 Boots United Drug 1920 US A 1933 Y R&D team poached from Burroughs Wellcome in c.1920. Divested 1933 (Corley, 2003) 20 Mentholatu Mentholatu 1924 US G Toothpaste m ltd m 21 Dodge ltd American 1927 US A Proprietary medicines 8 Home Products 22 St Jacob’s Oil AHP 1927 US A Proprietary medicines ltd 23 May & Baker Rhone 1927 F A Y Y Early sulfas. Initially v. small R&D, then major development Poulenc from mid-1930s, M&B 693 patent (Quirke, 2008; Slinn, 2008). 24 Internationa AHP 1927 US A Proprietary medicines l Chemical 25 Aspro ltd Aspro 1927 AU G Y R&D in Slough from 1950. Aspirin, followed by animal Nicholas S pharmaceuticals, vitamins & sedatives (Smith & Barrie, 1976, pp. 69-71, 82-3, 107-8, 158). 26 Mulford ltd Mulford 1928 US G 1929 Late entry into UK biologicals. 27 Sharp & Sharp & 1929 US A 1953 Acquired Mulford. Sulfas production in UK. Acquired by Dohme ltd Dohme Merck in 1953. 28 Bisodol AHP 1929 US A Proprietary medicines 29 Perox AHP 1930 US A Proprietary medicines 30 Wyeth AHP 1931 US G Y Pharmaceuticals 31 Anadin ltd AHP 1932 US A Proprietary medicines 32 Ex Lax ltd Ex Lax 1932 US G Laxatives 33 Lambert ltd Lambert 1932 US G Listerine antiseptic, toothpaste, shaving cream – merged

35 with Warner 1954 34 Warner ltd Warner 1932 US G toilet goods, cosmetics – merged with Lambert 1954 35 Pepsodent Pepsodent 1932 US ? Toothpaste ltd

37 Abbott Abbott 1937 US G Y Anaesthetics R&D from 1963, Slinn, 1999, pp. 50-2, 61, 78, Laboratories Laboratories 82. 38 Boyle ltd AHP 1937 US G Pharmaceuticals 39 Luft Tangee ltd Tangee 1938 US A Lipstick. 40 Gelatin Gelatin 1938 US G Gelatin capsules for pills. Products ltd Products 41 Tampax ltd Tampax 1938 US G surgical tampons as minor sideline 42 Eli Lilly ltd Eli Lilly 1939 US G Y Antibiotics – Basingstoke R&D from early 1950s, Kahn 1975, pp. 113, 131. 36 Ponds ltd Ponds 1933 US G Ponds Extract ‘pain destroying and healing’.

Table A.2. 1940-1963

Subsidiary name Parent firm name Entry Home Mo Exit (if CC/ Summary ‘Notes’, in Godley (2000), plus subsequent additional sources year de before patent 1963) 1963 43 Pharmaceutical Geigy 1940 CH G fine chemicals following earlier FDI in chemicals Labs ltd 44 Bayer ltd Sterling 1940 US G Proprietary medicines 45 Organon NV Organon 1940 NL G Y Followed earlier FDI by Anglo-Dutch food group. UK R&D became Laboratories central to diversification into pharma – eventually merged into AKZO (Verboeg 1998).

46 Cyanamid American 1945 US G Y Antibiotics R&D Gosport in 1950s, followed earlier FDI in

36 Products ltd Cyanamid (Lederle) chemicals (Slinn, 2008; Corley and Godley, 2011). 47 Miles Miles Laboratories 1947 US G Alka Seltzer – no evidence of anything other than adaptive R&D. Laboratories ltd 48 Merson’s Johnson & Johnson 1947 US A Surgical dressings, following earlier FDI in baby products (1928). Sutures ltd N.b. acquired competence creativity in novel baby products by 1963. 49 Roussel Roussel UCLAF 1948 F G Y Cortisone & major R&D by 1963 (Quirke, 2005, pp. 8-9, 20). Laboratories 50 ER Squibb ltd Squibb 1949 US G Y Antibiotics R&D, produced Quixalan 1962. HMG invited to acquire (ex Distiller’s) factory in Liverpool (Slinn, 2008). 51 Ortho Johnson & Johnson 1949 US G Surgical dressings, following earlier FDI in baby products (1928) Pharmaceutical s ltd 52 Foster McLellan Foster McLellan 1950 US G medicinal products ltd 53 Riker Rexall 1951 US G pharmaceutical chemicals Laboratories 54 Vicks ltd Vicks 1952 US G Vicks Vapo-Rub salve. 55 CF Gerhardt SB Penick 1952 US A Y Gerhardt-Penick major R&D from late 1950s, Mahoney, 1959, p. 189. 56 Chilcott Labs Warner 1952 US A Pharmaceutical medicines ltd 57 Pfizer ltd. Pfizer 1952 US G Y Sandwich major R&D (Mantle, 1994). 58 G.D. Searle G. D. Searle 1953 US G Y High Wycombe R&D from 1956. Derdak 1988. 59 Merck, Sharp & Merck 1953 US G Y Parent acq Sharp & Dohme in 1953, but invested in UK R&D Dohme ltd (Connor, 1991, p.15, Galambos and Sturchio, 1991, p. 140). 60 ELANCO ltd Eli Lilly 1954 US G Y Animal pharma & R&D (Corley and Godley, 2011). 61 Armour ltd Armour 1954 US G Y Hormones, followed earlier FDI in food and chemicals Pharmaceuticals 62 Stafford Miller Stafford Miller 1955 US G Dental fixatives ltd 63 Upjohn ltd Upjohn 1956 US JV Y R&D at Crawley from 1956. Carlisle 1987, p. 170, Mahoney, 1959, p. 216

37 64 Dentesive Miles Laboratories 1956 US A Dental fixatives 65 AJ White Smith, Kline 1956 US A Y R&D Centre at Camberwell 1956 (Quirke, 2008, p.325). French 66 UCLAF ltd Roussel UCLAF 1956 F G Y Cortico-steroids & hormones (Quirke, 2005). 67 TIC ltd TIC Gums 1957 US G Supplier for pill manufacturing 68 Thos Morsons Merck 1957 US A Former Merck supplier of fine chemicals incorporated into UK ltd business – (Connor, 1991, pp.15-19, Galambos and Sturchio, 1991, p. 140). 69 Bristol Labs ltd Bristol Myers 1957 US G Adaptive R&D. 70 Milton Vicks 1957 US A Antispetics ltd 71 Kemball Bishop Pfizer 1958 US A Acq by Pfizer – leading fine chemicals producer. 72 Wizard ltd Wizard Lightfoot 1959 US G Corn pads, arch supports etc. 73 Askit Aspro Nicholas 1959 AUS A Y Proprietary medicines, animal pharma, cobalt bullt (Smith & Laboratories Barrie, 1976, pp. 108-10, 122ff, 140.) 74 ASTRA Pharm ASTRA 1959 SW G Y ltd 75 PEBOC Ltd Philips-Duphar 1959 NL A vitamin & fine chemicals prodn – adaptive R&D. 76 Griffiths Aspro Nicholas 1960 AUS A Y Former British Schering pharma & R&D, also tranquilizers & Hughes hormones. (Smith & Barrie, 1976, pp. 111-9, Edwards and Howell, 2000). Alderley Edge R&D centre. See ♯ 6. 77 Whitmoyer Whitmoyer 1960 US A Anti-coccidiostat – animal pharma – adaptive UK R&D (Corley & Reed ltd Godley 2011). 78 Graesser Aspro Nicholas 1960 AUS A Y Producer of fine chemicals, salicylic acid & derivatives. Smith & Salicylates ltd Barrie, 1976, pp.119-20, 140-1. 79 Pretested Pretested Products 1961 US G Adaptive R&D Products ltd 80 Crookes Philips-Duphar 1961 NL A Y Slinn, 2008. Laboratory 81 British Drug Mead Johnson 1961 US A Y Major contraceptive R&D and patents (Slinn, 2008; Petrow and Houses Ltd Hartley 1996) 82 Exning Pfizer 1961 US A Y Major animal pharma R&D centre (Corley and Godley, 2011). Biological Labs

38 ltd 83 DISTA Products Eli Lilly 1962 US A Y Former Distiller’s/ Squibb Liverpool antibiotics facility (Slinn, ltd 2008, Kahn, 1975, p. 132) 84 Bridge SKF 1962 US A Y Chemicals 85 CIBA Chemicals CIBA 1962 CH G No evidence of R&D in pharmaceuticals. ltd Notes: Entry year is the year of entry into UK manufacturing. This typically post-dated UK sales agencies. Home is parent firm’s home nation. Modes of Entry are either Greenfield (‘G’), or Acquisition (‘A’). Exit is the year of divestment. Summary of ‘Notes’ is a selection of key-words from the ‘Notes’ field in the database in Godley (2000), which mostly states the leading product for the UK market. The columns CC1919-39 and CC/Patent 1945-63 indicate whether the particular subsidiary had acquired competence creating capabilities by the relevant benchmark date, a judgment made either through the available case study material, or through the subsidiary’s registration of a patent in the US from 1963 to 1973. Sources: Godley, 2000, Database (see below for description); Hall et al, 2001; and additional references in table.

39 Database:

The Godley (2000) database is built on the pioneering study of multinational enterprise into Great Britain, John Dunning’s American Investment in British Manufacturing Industry (1958), the original notes of which are located at the Henley Business School, University of Reading. Geoff Jones and Frankie Bostock (Bostock and Jones, 1994; Jones and Bostock, 1996) built substantially on Dunning’s database of MNE activity in UK and established that over period predating official statistics, at least 685 foreign parent companies had established at least 927 manufacturing subsidiaries in UK between 1850-1962. While the database population is inevitably incomplete, Jones and Bostock show that by the latter stages of their period it matches well with official estimates, and is certainly sufficiently comprehensive for valid generalisations to be made on the basis of the database evidence. Further refinements and additions came with Andrew Godley’s work on pioneer entrants (Godley 1999), on retailing entrants (Fletcher and Godley, 2000; Godley 2003). The database can be downloaded from the UK Data Archive (http://www.data-archive.ac.uk/), the actual database can be downloaded at http://www.data- archive.ac.uk/findingData/snDescription.asp?sn=4240&key=Godley.

More recently additional research has been undertaken on inward direct investment in British human and animal pharmaceuticals (Athreye and Godley, 2009; Corley and Godley, 2011; Godley and Williams, 2009). Where the results in the Appendix Table are now different than those from the published Godley (2000) database, the additional sources have been included in the Summary Notes column.

After successive validation processes, the database has been accepted as a near-comprehensive survey of inward direct investment into British manufacturing and retailing up to 1963 (as detailed above). A check on how large a sample of the total population this represented comes from noting that in 1965 there were 41 overseas subsidiaries that were members of the Association of British Pharmaceuticals Industry (Davies, 1965: 41). Unfortunately no list of these member firms exists. But the 70 subsidiaries included in the historic database for the 1945 to 1963 period includes over 40 entrants manufacturing prescription medicines for human usage (the criterion for ABPI membership) as well as several others engaged in manufacturing veterinary products, fine chemicals (specialised inputs for pharmaceutical products), non-prescription medicines, and hospital products (like surgical dressings).9 Nevertheless the database contains relatively little data of financial flows, nor research and development expenditure. The most robust variables are dates of entry and exit of

40 subsidiaries. And while it has been possible to ascribe 3-digit-SIC code classifications to all entrants, moving to the greater precision of the four- digit SIC classification has proven to be impossible for more than a minority of entrants.10 The database contains evidence relating to 85 subsidiaries of foreign parents in British pharmaceuticals between 1880 and 1963. Discounting the first two arrivals (1880 and 1888 respectively), there were 43 entrants in the 44 years from 1897 to 1940 (or almost exactly one per year), and then 40 entrants in just eighteen years from 1945 to 1963, or just over two per year.

Table A.3. Openness in UK Pharmaceuticals over the Twentieth Century

Exports £m Imports £m Output £m Openness Index 1900 <2 <2 <5 <80 1912 2 2 5 80 1919 5.367 4.390 11.2 87.1 1929 3.291 2.615 16.8 35.2 1935/6 3.058 1.367 19.7 22.5 1950 25 3 96.0 29.2 1960 49 5 199 27.1 1970 140 34 525 33.1 1980 745 222 2442 39.6 1990 2258 1158 6735 50.7

Notes: Openness Index = Total trade divided by total output - {(X+M)/Q}*100. Sources: 1900. Crude estimates based on assumption that trade increased faster than output from 1900-1912 (n.b. plausible assumption based on Foreman-Peck chapter 2). 1912. From Foreman Peck, 1992, p. 4, and n. 8 (output). 1919-1939 trade data from Foreman Peck, 1992, Table 4, p.8. (1939 data actually 1936). Foreman Peck’s data derived from British Parliamentary Papers, Trade and Navigation Reports. 1919 industry output is the 1912 total industry output adjusted for inflation. Undoubtedly domestic demand had increased, but the decline in trade was strongly associated with tariff increases outside the UK (e.g. Foreman-Peck, 1992, ‘Tariff protection was the norm in other countries’, p. 8). 1929-39. Industry Output data from Corley and Godley, 2011, Table 3, (1939 actually 1935 figure). 1950. Trade data from ABPI 1992, Table 10. Output data from Corley and Godley 2011, Table 3, (estimate for 1950 derived from straight-line interpolation between 1948 and 1951 (inflation-adjusted) Censuses of

41 Production figures cited there). Inflation adjustment using UK RPI from www.measuringworth.com. 1960 to 1990. All from ABPI 1992, Table 1.

1 Following the standard convention, this article omits resource-seeking investment from the analysis. 2 The terms are used interchangeably here. The literature tends to focus on R&D activities among subsidiaries, but it is explicitly recognised that the essential creative activity, where a subsidiary so taps into local knowledge-intensive resource that it contributes to parent product innovation, could reside in ‘powerful market research teams’, or in other non-R&D areas (Pearce and Papanastassiou, 2009, p. 10). 3 The UK did possess strong global advantages in clinical medicine and in sourcing raw drugs and fine chemicals which preceded its technological advantage in pharmaceuticals. 4 For instance, Pearce and Papanastassiou obtained 48 responses from 180 laboratories surveyed across all sectors, not only pharmaceuticals (albeit the sector provided the largest number of responses, pharmaceuticals represented over 25% of all private sector R&D in the UK in the 1990s), a response rate of just under 30%. Cantwell and Mudambi’s survey of engineering subsidiaries obtained a response rate of 40%. 5 It is important to note that patenting a UK invention in the US also suggests that the invention was of sufficient use to the parent company outside the UK market for it to be considered as evidence of more than simply adaptive R&D. UK subsidiaries wanting to patent innovations purely for local usage would only have patented them in the UK, not the US. 6 It is worth noting that the correlation coefficient of expected and actual outcomes over the five sub- periods is only 0.23, confirming that the expected relationship between changes in the level of competition and competence creating subsidiaries is not supported over the entire century. 7 Indeed, a modified openness index constructed by dividing only imports by industry output would clearly locate 1960 as the period when there was least competition, and only very slowly increasing by 1970, see Appendix Table A3. 8 Ford was perhaps a notable exception, with a quasi-network structure and three headquarter locations, the USA (which oversaw Latin America), Canada (British Empire apart from the UK), and the UK (Europe) (Wilkins 2011). 9 Other surveys show that 30 foreign-owned subsidiaries entered UK pharmaceuticals from 1945 to 1965 (Slinn 1984, p. 157). This compares with 43 subsidiaries listed here that entered during that period, again suggesting that the database is comprehensive regarding its coverage of the relevant population. 10 Firms’ eligibility for inclusion in the pharmaceuticals sector was not by principal products alone. Relevant secondary activities also led to subsidiaries inclusion. Relevant sidelines here would include Tampax’s surgical tampons and Luft Tangee’s medicinal lip-salve, for example.

42