Internationalising to create Firm Specific Advantages

1
Internationalising to create Firm Specific
Advantages

• US pharmaceutical firms in the 1930s and Indian
  pharmaceutical firms in the 1990s
• Suma Athreye (Brunel)
• Andrew Godley (Reading)

2
Technological discontinuity and market structure

• Role of entrants
• Creative destruction and new firms introduce new
  technologies, or
• New firms exploit radical technologies better
• Soete (1985) Can give rise to technological
  leapfrogging by new nations- ICT technologies

3
Technological discontinuity in globalised
industries

• Lessons from East Asia expand exports, develop
  firm capabilities, learn from MNEs
• Steinmueller ( 2001) identifies four
  pre-requisites for successful leapfrogging
• Develop own absorptive capacity to produce or use
  technology
• Access equipment and technological know-how
• Develop complementary technological capabilities
  (e.g. systemic architectures and knowledge)
• Develop downstream integration capabilities in
  product design and marketing

4
Technological discontinuity in globalised
industries

• IB literature suggests use of international
  strategies to acquire technological knowledge
• Acquisitions of technology based firms
• Licensing
• Alliances with foreign universities and foreign
  firms
• Use of immigrant networks to join technology and
  markets

5
Pharmaceutical sector

• Punctuated by discontinuities in knowledge base
• - antibiotics
• - biotechnology
• Changes in firm leadership
• Also changes in national leadership
• Is there a role for internationalisation
  strategies in changing leadership?

6
Comparison of two periods in Pharmaceutical
history

• 1930s discovery of antibiotics, international
  market for antibiotics due to wartime needs,
  barriers to FDI in many economies, US firms
  leapfrog from behind superior European rivals-
  gain patents
• 1990s the biotechnology revolution,
  international market for generics drugs some of
  which can be produced through the biotechnology
  route, global financial markets and no barriers
  to FDI, Indian firms attempt to leapfrog Western
  firms

7
Comparison of firms in the two periods

• US firms in 1930s
• Held no patents, leaders were European firms
• Large market for wartime antibiotics
• A patent regime in place, but mainly used for
  licensing
• Developed manufacturing /marketing capability
• Indian firms in 1990s
• Few patents, leaders were European countries and
  US
• Weak patent regime 1970-1990, strengthened in
  1995
• Large market for generics drugs due to foreign
  government procurement policies
• Reverse engineering and large scale manufacturing
  skills

8
Objectives of paper

• Role of internationalisation strategies in the
  technological catch-up of firms
• Which strategies?
• How did they contribute to catch-up?
• Similarities and differences

9
Internationalisation strategies of US firms
Outward investments

• US outward investments into Britain
• P prescription drugs manufacturers
• OTC over the counter drugs firms
• US firms one of the largest inward investors in
  UK Pharma sector
• Initial dominance of OTC firms in inward
  investment
• Followed by dominance of prescription drugs after
  the war
• Sources Godley 2000 and Bostock and Jones 1994.
  The chart includes the entire subset of entrants
  in pharmaceuticals - SIC 257 (using UK SIC 1980
  three digit codes, following Bostock and Jones
  1994).

10
Mode of entry of US firms (1914-1940)
11
Mode of entry of US firms

• Acquisitions/JV favoured by OTC firms (AHP,
  United Drugs and Bristol-Myers), as a quick way
  to enter the Prescriptions market- however first
  entry in OTC
• Acquisition of ingredients and manufacturing
  plants by European firms- and Us fine chemicals
  producers
• Diversification from other lines of activity

12
Internationalisation strategies of Indian firms
Outward investments

• Prior to 1990, main form of outward investment by
  Indian Pharma was JV and directed to neighbouring
  countries and African nations with large
  expatriate populations
• Post 1990, even spread between JV and WOS of 127
  known projects 64 were JV and 63 WOS.
• Most popular destinations USA (18), Nepal (13),
  UK (12), Uzbekistan (9), Mauritius (8), Russia (6
  ), China, Ireland, Netherlands and Thailand with
  5 projects each.

13
Acquisition activity of Indian firms (1995-2006)
14
Other advantages of internationalisation

• US firms
• - Sale of German assets after WW1related legacy
  factors ( Merck)
• - People links
• Alliances with UK Universities and Hospitals (
  merck, Parke-Davis and Eli-Lilly)
• Indian firms
• Contract manufacturing agreements with western
  MNEs
• Diaspora scientists

15
Similarities in leapfrogging strategies

• Firms attempted to diversify from cash-rich
  business lines (generics, OTC) to higher value
  adding lines of activity (prescription drugs, new
  chemical entities)
• The four pre-requisites for successful
  leapfrogging rarely available together
• Internationalisation helps compensate for missing
  elements- acquisitions also used by US OTC firms
  (AHP, United Drug and Bristol Myers)
• However, outward FDI only one element- alliances
  and people links important as well

16
Differences in leapfrogging strategies

• Globalised capital markets and tighter controls
  on the underlying knowledge base have probably
  made a acquisitions-based strategy more preferred
  by Indian firms
• The US industry was different. Key knowledge was
  presented in the summer of 1941 by Oxford
  scientists.
• Though Merck, Squibb and Pfizer were comparable
  to European firms in 1941, by end of 1943, 16
  firms had been able to acquire sufficient
  manufacturing capabilities to acquire licenses.
• But these 16 had benefitted more form exposure to
  best practice more through existing alliances
  than FDI. Firms with no external links to
  advanced research in Europe and Canada did not
  leapfrog successfully, even though the key
  information about laboratory manufacturing
  processes was made public in 1941.

17
So what?

• FSA believed to be the cause of outward FDI in a
  large literature- we show outward FDI can
  sometimes secure FSA when none exists.
• In discussions of technological leapfrogging
  inward FDI is privileged as the vehicle of
  technological transfer, but outward FDI can be
  useful as well.