24 June 2016 Structural changes in industry post financial crisis: A case study of the Cyprus pharmaceutical industry Master Thesis Political Science: International Relations Name: Maria Ioannou Student number: 11125721 Supervisor: Prof. Jeffrey Harrod Second Reader: Dr. Luc Fransen Abstract The thesis examines the impact of financial crises on industrial structures. It concretes financial crises as exogenous factors that alter industrial structures and analyses the effect of the contemporary global financial crisis on structural changes in industry by using a case study method of the Cyprus pharmaceutical industry. The thesis seeks to scrutinize the relationship between financial crises, industrial growth and structural changes. It uses Schumpeter and regime theories to explore the evolvement of industries during financial crises. The thesis argues that the impact of financial crises on industrial structures ascribes from the size of the countries΄ market, its dependency on external economies and industries΄ characteristics before crisis. The thesis finds that financial crises generate a rise of competition between firms and new ways to innovate although protectionist measures by governments determine the way firms operate during crisis. 1 Table of Contents List of Abbreviations………………………………………………………………………. 4 Chapter 1: Introduction 1.1 Introduction to the topic…………………………………………….………… 5 1.2 Research Question……………………………………………………………... 8 1.3 Methodology……………………………………………………………….…... 8 1.4 Case Study Selection……………………………………………………………9 1.5 Limitations of the study………………………………………………………... 10 1.6 Structure of the paper…………………………………………………………... 10 Chapter 2: Theoretical Framework 2.1 Schumpeter΄s Theory………………………………………………………….. 11 2.2 Regime Theory………………………………………………………………… 13 2.3 Conclusion of the chapter……………………………………………………… 14 Chapter 3: Financial crisis and industrial growth 3.1 Industrial sectors……………………………………………………………….. 15 3.2 The global pharmaceutical industry……………………………………………. 19 3.3 The case of Europe…………………………………………………………….. 25 3.4 Conclusion of the chapter……………………………………………………… 28 2 Chapter 4: The situation of Cyprus 4.1 Economic crisis in Cyprus……………………………………………………... 29 4.2 Impact on industrial structures…………………………………………………. 32 4.3 Conclusion of the chapter……………………………………………………… 37 Chapter 5: Pharmaceutical industry in Cyprus 5.1 Healthcare System……………………………………………………………... 38 5.2 Troika΄s Measures………………………………………………………………43 5.3 Pharmaceutical Law……………………………………………………………. 48 5.4 Conclusion of the chapter…………..…………………………………………...51 Chapter 6: Structural Changes in the Cyprus Pharma industry 6.1 Analysing Data………………………………………………………………….53 6.2 Interviews………………………………………………………………………. 56 6.3 Discussion Analysis……………………………………………………………. 60 6.4 Conclusion of the chapter…………………………..……………………...........62 Chapter 7: Conclusions………………………………………………………………….. 63 Chapter 8: References……………………………………………………………………. 67 Appendix 1: Tables………………………………………………………………………… 80 Appendix 2: Transcripts of interviews ……………...………………………….…………..119 Appendix 3: Annexes…………………………………………………….…....…….……...146 3 List of Abbreviations EC European Council ECB European Central Bank EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product IBC International Business Company IMF International Monetary Fund MNE Multinational Enterprise NHS National Health System R&D Research and Development TFP Total Factor Productivity 4 Chapter 1 Introduction 1.1 Introduction to the topic The latest global financial crisis is characterised by a uniqueness in terms of a wide range of economic factors including a dramatic impact on the international real activity, trade and inflation to a degree unprecedented since the second World War (Cecchetti et al., 2009, pp.1- 3). Particularly, consumer, business and investor confidence have tremendously decreased. The financial crisis became a global phenomenon because it did not only affect small and large countries but also the poor and rich ones (Claessens and Kose, 2013, p.3). OECD (2010, p.3) depicts, that there is a dramatic fall in trade flows that occurred during the height of the economic crisis where protectionist measures by the government have been developed and led into a restriction in trade between the states. Policy measures have been adopted by governments in response to the crisis and are being negative for trade because of their design and their intent to restrict or distort trade or increase trade costs (OECD, 2010, p.37). Moore and Miraei (2016, p.159) argue that the recent financial crisis led into the decrease of industrial growth although the impact is heterogeneous across industries. Specifically, the authors argue (Moore and Miraei, 2016, p.178) that the crisis had a negative impact mainly on the industries which are more reliant on external finance. Wehinger (2009, p.2) claims that fiscal policies led into the interpretation of existing strategies by firms where investors’ confidence has declined. Furthermore, new economic cycles could also lead into unpredictable changes in an industry level and influence firms to obtain structural strategies to overcome a financial crisis (Archibugi et al., 2013, p.1247). Consequently, financial crises provide an opportunity for companies to restructure productive facilities and to consider new opportunities to remain successful in the competitive arena (Archibugi et al., 2013, pp.1247). Caree and Thurik (in Audretsch and Thurik, 1999, pp.86-87) argue that a change in an economic activity leads to changes in industrial structures; a change in an economic activity can either lead into favourable processes of innovation of industries, can alter the role of small firms and industry dynamics or can affect the performing capabilities of firms and the strategies that they develop during an economic crisis (Caree and Thurik, 1999). Particularly, Schumpeter uses 5 the theory of “creative destruction” to describe the development process as an outcome of innovative strategies developed by firms to sustain their dominance in the market-arena (Archibugi et al., 2013, pp.1247). On the one hand, a few economic agents may emerge as winners because of the strategies they develop during a financial crisis. On the other hand, losers are more likely to be found among the companies that reduce their investment in innovation (Archibugi et al., 2013, pp.1247). However, as regime theory explains, multinational corporations which affect trade policies could lead into an alteration of a specific regime and a specific issue-area (Oshiba, 2011, p.3). Nevertheless, economic stability in an industry could be obtained in a post period of financial crisis when the creative industries attract investors, businesses and consumers (Brabazon, 2014, p.9). For the purpose of this thesis, the paper views financial crises as “extreme manifestations of the interactions between the financial sector and the economy” (Claessens and Kose, 2013, p.3) and industrial structures as “structural changes that occur in the sector- structure of an economy, where “sectors” are some theoretical “groups” of goods and services” that too epitomise the development process (Stijepic, 2010, p.III). Silva and Teixeira (2008, in Memedovic and Lapadre, 2010, p.4) state, that structural changes “can be studied by focusing on a relatively small number of groups or activities that comprise the economic system, and form the economic structure”. Therefore, this thesis by focusing on the pharmaceutical industry, aims to investigate the ways in which financial crises affect industrial structures. Malebra and Orsenigo (2015, p.665) argue that economic behaviour is conceptualized by being driven by rules and routines that surround the sector. The pharmaceutical industry has been continuously changing over a century as a consequence of the interaction of exogenous shocks such as technological, market, financial, political opportunities and constraints. The differential performances of the pharmaceutical firms in the industry have been formulated as a result of the interaction of processes of learning, such as technological, organisational, market, financial and political circumstances (Malerba and Orsenigo, 2015, p.664). Therefore, that is not to say that this research paper marginalises other reasons that affect the industrial structure of the pharmaceutical industry but instead, emphasises the effect of the financial crisis as a consequence of a central exogenous factor that influences the structure of the industry. In particular, Cecchetti et al. (2009, p.1), Lőrinczy (2013, p.21), Monastiriotis (2014, p.80), Zamora-Kapoor and Koller (2014, p.1511) argue that the financial 6 crisis has transformed trade policies while as a consequence, the structure of the pharmaceutical industry has been revised. Significantly, everyone seeks health care at some point in his or her life and thus, the role of manufacturers and suppliers of medications and medical devices is significant (Bauchner et al., 2013, p.609). Buysse (2009, p.3) explains that global financial crises have a considerable impact on governments’ budgets and the available funding for health services. Hence, the pharmaceutical industry becomes “a creature of government, because it cannot exist for long without government protection of its economic turf” (Reinhardt, 2001, p.136). As the purpose of this thesis is to investigate the structural changes in industry post financial crisis with a focus on the pharmaceutical industry, it is crucial to first determine the role of the financial crisis