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
1 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.
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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
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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
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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
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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
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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
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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 on industrial structures.
Firstly, the potent role of the pharmaceutical companies is depicted on the fact that nearly every government in the developed world supports funded health related research (Malebra and Orsenigo, 2015, p.668). Nevertheless, a lack of performance of pharmaceuticals has been remarkable due to the lack of emphasis that is given by the government for innovation and profitability in medicine products. Additionally, price control by the government has discouraged research and development projects as well new business firms from entering the industry (Malebra and Orsenigo, 2015, p.668, 680). Therefore, market competition becomes more absent although it is the primary mechanism to pull down prices in medicine products. Pharmaceutical industry experts claim that inconsistent policies of successive governments are the biggest reason for this disparity and the oligopolistic market that is found in the pharmaceutical industry (Shahzad, 2002, p.23). Moreover, the extreme economic, political and ethical trade-offs that are inherent in the nature of pharmaceutical industry lead to new concerns over the structure of the pharmaceutical industry thoroughly. Thus, how the industrial structures are affected by financial crises?
The alteration of the industrial structures saw a great effect especially on countries that have been centrally affected by the financial crisis and new political strategies have been escalated to overcome the domestic market crisis (Clerides and Stephanou, 2009, p.34). Monastiriotis (2014, p.84) argues that the implementation of austerity policies affects in a negative way growth and debt sustainability in the short-run. Institutional changes have been generated, as a result of governmental efforts and imposed austerity policies that have been developed to face the crisis. Additionally, financial crises shift the structure of the political
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field, allowing the rise of new political actors and novel alignments on both new and old political issues. As a result, political changes have a considerable impact on the pharmaceutical industry as the industry is going through changes because it needs to react to the global economic demands (Lőrinczy, 2013, p.21). These phenomena are very apparent especially in small countries where markets are financially depended on other economies (Lorinczy, 2013, p.30). The financial crisis of the late 2000s as Zamora-Kapoor and Koller (2014, p.1511) explain, has increasingly transformed Europe with a more emphasis given in the South of Europe because is one of the regions where the consequences of the crisis have become most salient.
Therefore, the thesis aims to investigate the role of the financial crisis in structural changes and uses a case study of the pharmaceutical industry of Cyprus to investigate the ways in which financial crises affect industrial changes.
1.2 Research Question
The purpose of this thesis is to provide an in-depth information on the role of the financial crisis in industrial changes. The research question the thesis addresses is: How do financial crises affect industrial structures?
1.3 Methodology
To study the effect of financial crises on industrial structures, the research includes a Case Study method and a qualitative research of the Cyprus pharmaceutical industry. The thesis uses a theoretical framework of Schumpeter’s and regime theory to test the hypotheses that rise through the particular theories to study the effect of financial crises on industrial structures.
A mixture of primary sources- newspapers and governmental documents- as well semi-structured interviews by seven experts in the field are included to investigate the impact of the financial crisis on the pharmaceutical industry in Cyprus. The interviews took part in Cyprus between 19th and 24th of April, 2016 and each interview lasted approximately ten
minutes as also all of the interviews have been recorded. The interviews are comprised of six same questions to all of the participants and further questions were adjusted according to the interviewees΄ specialization and the form of discussion. Six of the interviews were held by a
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direct interaction and one by telephone as the interviewee denied to meet in person (Anonymous 2). The interviews aim to investigate the ways in which the economic crisis that started in 2012 in Cyprus affected the structure of the pharmaceutical industry in the country. Primary sources encompass a study on the Cyprus pharmaceutical law and the demands of Troika to analyse the political impact on the industrial structure of the pharmaceutical industry in Cyprus. Newspaper documents which explicitly refer to the effects of the economic crisis on pharmaceutical products are included to identify any structural changes that occurred in the pharmaceutical industry during the economic crisis in Cyprus. The Pharmaceutical Price Lists of 2006, 2009, 2012, 2015 and 2016 published by the Pharmaceutical Services, Ministry of Health, are the main primary sources of this paper and are used to make a before-after analysis. The particular analysis aims to find whether changes in the dynamics of the pharmaceutical companies- manufacturers, distribution and multinational companies- took place during the financial crisis as well as to examine the main characteristics of the Cyprus pharmaceutical industry and the industrial changes as an result of the financial crisis.
1.4 Case Study selection
Cyprus entered the European Monetary Programme in March, 2013 to March, 2016 as an outcome of the banking crisis that started in 2012 in the country. Demands and austerity programs by Troika have been developed and led into the alterations of several sectors in the country΄s economy (Rapanos and Kaplanoglou, 2014, p.7). Cyprus moreover, experienced unpredictable shifts in its economy due to the financial crisis mainly because of its small economy and its dependency on other economies through foreign investment (Rapanos and Kaplanoglou, 2014, p.8). Some main articulations for the particular case study are the small market that describes Cyprus, the small number of manufacturers of pharmaceutical products and the existing predominance of multinational companies in supplying pharmaceutical products to the domestic market (Petrou and Vandoros, 2015, p.563). Moreover, what makes the pharmaceutical market in Cyprus unique are that and there is no universal health insurance scheme, the distinction between the public and the private healthcare sector where different pharmaceutical products supply each sector (Petrou and Vandoros, 2015, p.563). Yet, Cyprus was one of the countries that experienced an economic crisis in 2012 as an effect of the contemporary financial crisis.
10 1.5 Limitations of the thesis
One central limitation isthat most of the available information on the Cyprus pharmaceutical industry, the primary sources and mainly in the Greek language. All interviews were also conducted in Greek. Because of the language ability the particular primary sources and the transcripts of interviews are translated by the author.
The primary aim of this thesis was to include the Pharmaceutical Price List before the global financial crisis. However the particular information is not available as the Pharmaceutical Price List of 2007 and of 2008 is not published. For that reason, the thesis includes an analysis of the year 2006 to study the Cyprus pharmaceutical industry before financial crisis and then to compare with the years 2009, 2012, 2015 and 2016 to find whether structural changes in the pharmaceutical industry are affected as an outcome of the financial crisis.
1.6 Structure of the paper
The purpose of this thesis is to investigate the ways in which structural changes in industry is affected after the financial crisis with a focus on the pharmaceutical industry. The thesis aims to provide a thorough analysis on the topic. The next chapter uses Schumpeter’s and regime’s theory to interpret the ways to which financial crises affect industrial structures. Chapter 3 illustrates the impact of the contemporary financial crisis on industrial growth with a particular emphasis on the global pharmaceutical industry as well it distinguishes the case of Europe. Chapter 4 illustrates the situation of Cyprus and the impact of the contemporary financial crisis on Cyprus΄ trade and seeks to provide a synthesis of analysis by depicting the role of the financial crisis on the different industrial sectors in the country. Chapter 5 provides an in-depth examination on the structure of the pharmaceutical industry in Cyprus and the effects of the economic crisis on the structural changes. The chapter comprises a study of the healthcare system of the country, Troika΄s policy measures and a study of the Cyprus Pharmaceutical Law. Chapter 6 includes the annual pharmaceutical price lists by the department of Pharmaceutical Services, newspaper and Ministerial documents and the interviews, thus to provide a thorough analysis on the industrial changes in post-financial crisis. Finally, Chapter 7 presents the findings and concludes the ways in which financial crises affect industrial structures.
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Chapter 2
Theoretical Framework
This chapter uses Schumpeter’s theory of creative destruction and regime theory on international institutions to provide an in-depth analysis on the theoretical hypotheses that arise under which financial crises affect structural changes in the pharmaceutical industry.
2.1 Schumpeter’s theory
Schumpeter created the term “creative destruction” to articulate economic growth through the efficiency of firms to remain dynamic when they adopt innovation strategies. Significantly, Schumpeter believed that economic development is merely associated with innovation as also the industrial structure and innovation are related holds (Nicolas, 2003, p.1055; Schumpeter, 1927, p.311).
Schumpeter’s approach views financial crises as essential elements of the capitalist processes and do not need to be individually explained because they are a creation of capitalism (Schumpeter, 1927, p.287). Economic crises as Schumpeter argues (1927, p.288), are characterised by a “circular flow”, which describes that “all economic activities are essentially repetitive and follow a familiar routine course”. Schumpeter further argued that because firms know the total demand for goods, they adjust the supply of output accordingly (Schumpeter, 1927, p.288). Therefore, the demand and supply are in equilibrium at each point of time. Moreover, as this equilibrium is continually affected by growth, it tends to re-establish thus to produce the “business cycle”. Schumpeter views that industrial fluctuations are the outcome of the particular “business cycle” as firms work in a system under a competitive equilibrium. The author (1935, p.168) supports, that by using this cycle one can understand all of the processes that are reflected at a particular time period because firms always adjust themselves to changes and always recover to sustain that equilibrium. A creative response therefore takes place when firms develop practices that aim to change social and economic situations positively (Schumpeter, 1947, p.150). According to Schumpeter, (1947, p.150) an entrepreneur innovates to earn profits. However, these profits rise because of the dynamic changes resulting from innovation practices as well they continue
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to take place until the innovation becomes general and sustainable. Hence, economic development is a dynamic and discontinuous process where innovation is the key source of a favourable progress (Somashekar, 2003, p.77).
Structural changes transcribe, by the entrance of new firms in the field of production or some firms disappear and that encloses the primary role of innovation. New products start appearing in the market with the particular entrance of new firms that consequently displace the role of the old products. This process of capitalist development is regarded as creative destruction wherein the old economic structures of society after destructions are ultimately replaces by new economic structures (Somashekar, 2003, p.77). Particularly, a crisis for Schumpeter is “a process by which economic life adapts itself to the new economic conditions” (Schumpeter, 1943 in Somashekar, 2003, p.76). In the Schumpeterian literature, economic development is associated with technological changes and the drivers of innovation (Somashekar, 2003, p.76). Winners evolve as a result of the development of innovation strategies and losers are likely to be developed among the firms that decline their investment in innovation (Archibugi et al., 2013, pp.1247).
However, by taking into account Schumpeter’s theory and the dynamic position of technological growth we exclude any other factors that are able to alter industrial changes. The pharmaceutical industry is associated with technological changes, political circumstances as well financial capabilities (Malebra and Orsenigo, 2015, p.665). For instance, could technological growth be sustained in the height of an economic crisis? Evangelista (2015, p.3) argues that not only economic crises differentiate to one another because of their different nature and their effects, but the contemporary financial crisis had challenged the widespread positivistic view on the role technology plays in economies and societies because of its tremendous negative impact on the society. On the other hand, Schumpeter (1943, p.82) states that because capitalism deals with an evolutionary progress, exogenous phenomena need to be considered as secondary factors that can alter industrial structures.
The term “creative destruction” emanates from the concept that new firms may enter an industry as a result of the endogenous relationship between market power and economic growth (Nicolas, 2003, p.1023). Schumpeter’s hypothesis on market structures suggests a strong affiliation between large firms with considerable degree of market power and incremental technological progress that in turn accelerates economic growth and improve the standard of living (Nicolas, 2003, pp.1023-1025). Based on the assumption that firms are driven by technological processes and innovation, what strategies are they using during a
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financial crisis and how industrial development is affected? Additionally, could the role of policies and financial institutions become central for encouraging innovation and facilitate creative destruction in the industrial sector?
Therefore, while Schumpeter’s theory on innovation and creative destruction provides an understanding of how industrial structures could be affected, it raises questions on the capabilities of firms to sustain their market position during a financial crisis.
2.2 Regime theory
Regime theory on the other hand, stresses the importance of decision-making procedures that affect actors’ expectations in a specific issue-area (Krasner, 1982, p.185; Oshiba, 2011, p.2). In particular, Krasner defines regimes as “sets of implicit or explicit principles, norms, rules and decision-making procedures around which actors’ expectations converge in a given area of international relations” (Krasner, 1982, p.185). Financial crises play a major part on the adoption of policy measures where in Europe these procedures became more crucial (Zamora-Kapoor and Koller (2014, p.1511). Particularly, financial crises affect decision-making procedures that could lead into a thorough change of an industry and influence the potent role of the enterprises (Krasner, 1982, p.186; Oshiba, 2011, p.2). A change in domestic politics such as in trade, in the financial sector and in the sectors of economy can influence all the actors involved within the system (Zamora-Kapoor and Koller (2014, p.1511). For this reason, the thesis uses regime theory to examine how international regimes can influence industrial structures during financial crises.
Significantly, international regimes such as IMF, are conceptually institutions and have the capacity of providing financial assistance to economies (Gehring, 1994, p.23; Szyliowicz, 2012, p.136). Therefore, international regimes that intervene in a national level processes and affect trade outcomes, alter industrial structures whereas during a financial crisis this impact strengthens as many governments adapt protectionist measures to overcome the crisis (Haggard and Simmons, 1987, p.495). Moreover, Krasner (1982, p.189) argues that regimes are important catalysts of influencing behaviour and outcomes because they are “basic causal variables” which are characterised by power and interests. Moreover, Krasner (1982, p.191) views market industries as determinants of atomization. For that reason, when the distribution of power change behaviour, regimes’ structures will be affected (Krasner, 1982, p.191).
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Regime theory provides with an analogy to the very nature of the pharmaceutical industry. For instance, Krasner (1982, pp.201-202) -by using Hirsch example of the evolution of capitalist systems- argues that without “pre-capitalist” values such as, hard work and sacrifices, capitalism would have be fallen apart. Significantly, the pharmaceutical industry was born in the late nineteenth century as a segment of the chemical sector (Malebra and Orsenigo, 2015, p.667). Whereas, the rising of the modern pharmaceutical industry which is usually labelled as ‘the Golden Age’, had effectively took place after the 1940s as a result of different and interacting events and processes (Malebra and Orsenigo, 2015, p.668). Darroch and Miles (2011, p.725) note that market-creating innovations need to come from firms with a well-developed marketing capability. In regards to the pharmaceutical industry, this means that those within the firms need to possess superior market sensing and opportunity recognition capabilities, to uncover a demand and then to develop demand for a particular product by persuading the consumers that the specific new product addresses their implicit or explicit needs (Darroch and Miles, 2011, p.725). The significance of health for people’s well-being makes the pharmaceutical market one of the most key industries in the world (Bauchner et al., 2013, p.609; Reinhardt, 2001, p.136).
The regime theory explains that an alteration on decision-making procedures influence regulatory policies and these in turn affect industrial structures (Szyliowicz, 2012, p.150). Given the potent role of regimes, the thesis is concerned with the ways international institutions attribute to any alternation in industrial structures during a financial crisis.
2.3 Conclusion of the chapter
This chapter includes Schumpeter’s theory and regime theory to explain the variety of the ways industrial structures are affected. On the one hand, Schumpeter’s theory demonstrates the important role of innovation in the industrial development. On the other hand, regime theory signifies the role of international regimes into domestic-politics procedures that affect industrial structures. Thus, the next chapter examines the ways in which global financial crises affect industrial growth and innovation as also, how policy measures influence industrial structures with an emphasis on Europe.
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Chapter 3
Financial crisis and industrial growth
The chapter analyses the structural changes in the global pharmaceutical industry as a result of the contemporary financial crisis with a focus on Europe and looks into the impact of the policy measures that have been developed on industrial structures.
3.1 Industrial sectors
The current global financial crisis stigmatised industrial growth in many economies worldwide (Gros and Alcidi, 2010, p.4).A rise in risk aversion and financial market volatility was transmitted worldwide as financial markets are highly integrated at the international arena. Whereas, within Europe, the crisis affected all of the member states because the integration of financial markets and supply chains is even stronger than it is at the global level (Gros and Alcidi, 2010, p.4). Importantly, the financial crisis started in the United States in 2007 and involved financial institutions in many OECD countries. Developing and emerging market economies were thereafter affected when the crisis became global, mainly through the trade channel, or through workers’ falling remittances (Dullien et al., 2010, p.1).
The worldwide recession which is the first since the Second World War, led to a reduction of world GDP by 0.6 per cent in 2009. Graph 1 depicts that countries that constitute the Commonwealth of Independent States such as Cyprus and those in Central and Eastern Europe were the most severely affected. Significantly, their GDP growth rates fell by 15.2 percentage points between 2007 and 2009. In general, countries with large current-account deficits or surpluses, and those with large fiscal deficits prior to the crisis have been affected much greater than others. Development strategies and quick policy responses led emerging economies to be the winners in the global market in relation to other economies because of their capacity to return to their previous paths of high growth (Dullien et al, 2010, p.5).
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Graph 1
Annual GDP growth, 2005–2010
Source: Dullien et al. (2010, p.2)
On the other hand, economic crises are historically times of industrial renewal (OECD, 2009, p.8). Deriving from Schumpeter’s theory, OECD (2009, p.8) shows that less efficient firms fail while more dynamic ones emerge and expand while the majority of firms that have been affected by the crisis are small-and medium-sized enterprises. The current economic crisis however, is not the result of the emergence of a superior innovation that has rendered some existing industries obsolete. Instead, the crisis generates destructive forces that bring economic growth to a halt and weaken the dynamics of innovation and industrial renewal (OECD, 2009, p.8). Processes of strategic planning are delayed as firms need to primary adjust to the crisis. The downturn in trade and FDI (Annex 1) have a negative impact on firms that are significantly dependent on sourcing from overseas. Moreover, the financial crisis might deepen linkages between industries in different countries because of the complex sourcing strategies of firms. A sharp decline in trade and in the FDI and in the access to international financing, poses a risk to the global supply chains that underpin innovation (OECD, 2009, p.11). Laperche et al. (2010, p.1317) argue that the strategy of multinational enterprises combines a constant supply renewal both through technological, organizational and commercial innovation as well the renewal of production rationalization such as, reduction of production costs. The financial dimension which is narrowly linked to these strategies, generates a strong pressure on enterprises because of the financial deregulation
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that aims at increasing the shareholder value. The economic crisis is also widely seen as a catalyst for the development of new innovation paths (Laperche et al., 2010, p.1319). A fundamental impact of the crisis on industrial groups is depicted on the decline in sales volumes in the industrialized countries, where sales prices and margins are the highest. Maintaining margin is essential as well as seeking support and assistance to pursue innovation development during a financial crisis. However, different sectors are also developing new ways to innovate. Innovation could take the form of exploitation of new markets and products or on its accumulation to develop more radical innovations. (Laperche et al., 2010, p.1320).
Graph 2
Industrial production growth rate (Globally)
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Table 1
Financial crisis and Risk assessment in 14 sectors (2014)
Source: Khalid and Guillaume (2014, p.2) Numerous industries have experienced fluctuations on their operation as a result of the current economic crisis; Figure 2 illustrates the industrial production worldwide and depicts that in the height of the current financial crisis, industrial production has been decreased where thereafter it has been slowly recovered. Moreover, Table 1 portrays the impact of the economic crisis on business risk in 15 different industries and 3 regions using the survey by Khalid and Guillaume (2014). North America witnessed important development in the chemical, the transportation and the textile-clothing industries because of the good shape of the American economy as also because of the fall in oil prices (Khalid and Guillaume, 2014, p.1). Industries which have been centrally affected are mainly from European countries where all industries are strongly or moderately affected by the economic crisis. Particularly, sectors that are linked to infrastructure such as, metallurgy, chemicals and construction are characterised by overcapacity. On the other hand, in Asia many sectors benefit from the marked decline in the prices of products and raw materials. In general, emerging Asia is now one of the most emerging economy and a strong competitor of Europe (European Commission, 2014, p.2).
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The pharmaceutical industry is among the industries that experienced different impact depending on the particularity of the region investigated. In Western Europe the industry faces high risk because of the severe policies that have developed in the region, for instance through cutting the health spending and through growing government regulation of the industry (Khalid and Guillaume, 2014, p.10). Significantly, the pharmaceutical industry is regulated by public authorities because of the considerable health and social issues (Khalid and Guillaume, 2014, p.10). The decisions taken by the authorities influence the activities of pharmaceutical companies; One of the main measures European Union developed, was the demand of cutting in the prices -not only for medicines that were still protected by patents but also for generic medicines- and that led into a rise of generic companies as also resulted in a change in the pharmaceutical structure (Khalid and Guillaume, 2014, p.10).
Consequently, in the pharmaceutical industry, the crisis has accelerated the reduction in health spending and in particular the amount devoted to medicines. Industrial sectors have been affected by the crisis in both negative and positive ways; while the financial crisis seems to alter strategies obtained by firms in different industries because of the business risk that they face. Nevertheless, some enterprises successfully increased their dominance due to the strategies that have developed.
3.2 The global pharmaceutical industry
The global pharmaceutical industry, or the “Big Pharma”- has been identified as an oligopolistic multinational market where high prices and profits, a lack of price competition and heavy product differentiation exists within the industry (Craig, 1994, p.1). Consumer exploitation as well unsafe and poor quality pharmaceutical products is possible as a result of the industry’s oligopolistic nature. Governments throughout the world develop measures to prevent this situation where in times when the industry faces difficulties, concerns over unsafe products are increasing (Craig, 1994, p.2). Moreover, such regulations can significantly dominate the industry’s structure and its conduct worldwide (Craig, 1994, p.3). However, while the industry faces fluctuations within its structure, it is argued that its dynamic strength -because of the social importance of pharmaceutical products, and the key role of the pharmaceutical companies- suggests that the industry will adapt to the changes and will continue to be successful (Craig, 1994, p.1). Moreover, to examine the impact of the
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financial crisis on the industry’s structure it is of main importance to first define the structure of the global pharmaceutical industry and its primary mechanisms.
As it has been previously stated, the pharmaceutical industry is of great interest because of its relatively young and extremely successful background. The Second World War acted as an impetus for the pharmaceutical industry as demands to provide drugs for treatment and cure of illness, general medical knowledge and better medical equipment were developed and were influenced the evolutionary character of the industry (Craig, 1994, p.2). Soon the industry had developed into an oligopolistic market with the individual firms that dominated the market to form a multinational character later (Craig, 1994, pp1-2). As demand for pharmaceutical products took an international scale and R&D for such products were of massive importance for those specific firms, international marketing became the only possibility for many of the products that were developed. By becoming MNEs these companies had been able to take advantage of the global market demand (Craig, 1994, p.50; Dunning, 2013, p.136). Furthermore, financial and technical resources for innovation have allowed MNEs to dominate the market with their developments (Craig, 1994, p.50; Hashemi, 2012, p.2). MNEs are distinguished by product differentiation, high R&D expenditures, high promotional activities associated with barriers to entry and marked specialisation in such fields as marketing and management (Craig, 1994, p.50; Dunning, 2013, pp.133-135). Smaller companies may innovate successfully although in the current competitive climate such small companies do not have the funds to develop and create their discoveries rapidly. Additionally, as Achilladelis and Antonakis explain (2001, p.539) technological innovation is one of the most dynamic processes of all industrial activities. Whereas, a change in R&D sector could affect the pharmaceutical industry because of the creation of new drugs, the originality of the products, the brand loyalty and the market competition (Achilladelis and Antonakis, 2001, p.540). Cockburn (2004, p.16) further notes that the alternation on the structure of the industry is also defined as a profit-seeking market where increased willingness to exploit external sources of technology -through in licensing or strategic partnerships- reinforces firms not only to survive but to extent the competition that transcribes in the industry.
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Table 2
Driving forces of the pharmaceutical industry
Complied by the author from Craig (1994) Graowski (2011) and Hashemi (2012)
The structure of the industry is explained by various parameters. Table 2 illustrates the factors that affect the structure of the pharmaceutical industry using the studies by Craig (1994, pp.54-58), Graowski (2011, pp.164-168) and Hashemi (2012, pp.1-2). The oligopolistic market refers to the very nature of the pharmaceutical industry, for example through the expansion of small firms and the evolution of the domestic market in general (Craig, 1994, p.55). Secondly, the demand side is defined by market and consumer demand such as, the increased insurance coverage, prescription drugs, generic competition, sales and innovative drugs. Moreover, any changes in the biotechnology sector can affect the structure of the pharmaceutical industry because of the dependence of the pharmaceutical market on technology-driven stage firms and on the creation of new medicines. Technological growth and R&D costs therefore stimulate the evolution of pharmaceutical firms (Craig, 1994, p.56; Graowski, 2011, pp.167). Inequalities of production costs may drive pharmaceutical firms to research and develop away from home countries because of the regulations on such activities and the high costs (Hashemi, 2012, p.1). For instance, many pharmaceutical firms from France, Italy, Japan and Canada started taking the prices in the United Kingdom as a benchmark to maximise the impact of the decisions taken in that country -which it accounts for nearly a quarter of the world market for sales of pharmaceutical products (Khalid and Guillaume, p.11). Moreover, fluctuations in currency values and spread risks as well constraints of the international environment for instance, tariffs, import quotas, consumer
22
preferences, policy issues, all influence decisions taken by firms as well affect their development and consequently lead into changes in the structure of the global pharmaceutical industry (Graowski, 2011, pp.165).
Therefore, is the financial crisis a factor that affects the structure of the pharmaceutical industry? If we take into account the various parameters that define the driving forces of the industry, we note that alterations in the industry’s structure are expected to be reformed during an economic crisis, for instance through fall in currency values, alterations in domestic-policies and innovation practices. As Lőrinczy (2013, p.2) explains, healthcare policies are strongly connected with pharmaceutical products and an economic recession results into changes by governments in the health system of particular countries. The access in free-care systems increases in a period of a financial crisis as also, prescriptions and substitutions, new fees of medicines, non-transparent prices, changes of reimbursement and ethical issues become more visible. Moreover, consumers΄ purchasing power change, as a consequence of the economic stress that leads consumers and health services to choose to buy non-patent protected generics instead of patent protected brands (Buysse, 2010, p.47). The increasing pressure on the healthcare sector affects pharmaceutical companies to redefine their strategies and also it alters the industrial structure of the industry (Behner et al, 2009, p.2). Biotech companies do not have stable cash flows from products because they are experiencing difficulties as an outcome of the credit crunch that leads into a loss of their traditional funding sources (Behner et al, 2009, p.3). R&D growth has been decreasing during the current economic crisis at a global arena (Annex 2). An economic downturn affects the budgets available for healthcare- on both the public and private sectors- reducing their ability and willingness to pay for healthcare both from market and the consumer side. Governments and institutions intensify scrutiny of healthcare budgets which lead into a change on the structure of the pharmaceutical industry. More specifically, the industry faces a decrease of drug prices, a growth on generic substitution, and a rise of the demands for proof of value (Behner et al., 2009, pp.2-4).
However, as Flanagan et al. (2008, p.9) argue, an economic crisis may seem “a challenging opportunity”, but it could also mean “a genuine opportunity” of firms to further develop as the pharmaceutical industry was shown to cope with exogenous shocks. A recent example which depicts the impact of the financial crisis during and after of financial crisis is the Japanese pharmaceutical industry. Particularly, the Lost Decades in Japan stimulated a reformation of the industry (Umemura, 2014, p.832). Japan’s national system of innovation
23
has evolved from an autarkic, firm-based domestic system to a more open, networked, global system between 1990 and 2010 (Umemura, 2014, p.832). During the recession, actors within the system made valiant efforts to upgrade the nature of innovation, supranational organisations influenced the government’s updating and public confidence rose as the government took control over the industry. Nevertheless, the changes during the Lost Decades had an evasive impact on pharmaceutical firms; in 1997 there were 436 prescription drug makers but only 107 remained by 2010. Moreover, a wave of mergers and acquisitions swept over many large firms, and a good number of small to medium-sized firms went out of business (Umemura, 2014, pp.832-834).
Notably, at the global level the main challenges the pharmaceutical industry faces are the creation of more value for patients, providers and payers as well for shareholders (Pwc, 2012, p.4). Demand for pharmaceutical products is continually rising as a result of independent reasons such as the rising of global population, aging and today’s living standards (Pwc, 2012, p.4). However, financial pressures have led into hardening of healthcare payers’ policies and higher taxation which that led into alterations in the global pharmaceutical industry (Pwc, 2012, p.6; Pwc, 2010, p.2). The mature markets have experienced enormous turmoil while in strongest economies they tend to be recovered. Innovation has declined, strict regulations increased and market conditions became more severe because of the rise of healthcare costs (PwC, 2012, p.7). In addition, price controls and greater government scrutiny led into changing marketing and sales font as a different market demand evolves. From 2013, all hospitals which served medicare patients with the most common conditions started paying for the quality of the care rather than the quantity of services that they supply (Evaluate Pharma, 2014, p.7). These changes expose medicines to much greater scrutiny and endanger value-based purchasing (Pwc, 2012, p.12). Countries are encouraging generic prescribing where some independently from financial crisis, and others increased generic prescribing as an outcome of the crisis as new medicines which are more economically and clinically effective are reducing (Evaluate Pharma, 2014, p.10). The financial crisis also led patents to choose lower prices on medicines and buy the most affordable product (Pwc, 2012, p.12). Hence, the financial crisis reinforces the evolution of generic products and innovation becomes extremely important for brand-name companies.
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Table 3
Prescription Drug Sales during financial crisis in Europe
Source: Evaluate Pharma (2014, p.10)
The financial crisis led into changes in the firms’ strategies; before the financial crisis companies followed a route of four main profit forces namely: R&D productivity, cost cutting, marketing and extension of firms (Pwc, 2012, p.14). Most companies relied mainly on marketing but the specific lever became less effective during the crisis because of the rising of competition among the companies and pharmaceutical products. Table 3 summarizes the effect of the crisis on prescription drug sales and shows a reduction on the number of the drug sales in the top 20 companies during the financial crisis in Europe. As the table illustrates, currency values had also affected the growth of the MNEs whereas some companies accomplished into increasing their demand. Companies have been focusing on volume sales and market share, particularly by selling primary-care products, using differential pricing and building generics divisions (Pwc, 2012, p.19). For instance, Eli Lilly focuses on selling branded medicines. Sanofi, invested heavily in building generic products while Merck & Co. emphasises brand-name quality and generic products adoption. Roche- which is one of the companies that experienced growth during the current financial crisis, sustained in its policy of same prices for the same products regardless of consumption. Novartis moreover, implemented the prices of its original and main products on cancer therapies while the company permitted the production of generic versions of patented drugs.
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The company also collaborates with Gilead Sciences for buying aid medicines. Furthermore, some patients are now willing to pay extra for the reassurance that comes with big brands though these numbers are diminishing as governments cut back on reimbursement charges and promote local producers (Pwc, 2012, p.21).
As costs are still rising relentlessly many of the big players have simultaneously been experimenting with new R&D structures where in periods of crisis, reallocations of resources encounter difficulties and postpone the process of “creative destruction” (Laperche et al., 2011, p.1323). Globally, the R&D2 expenses of groups, mainly financed by cash flow and
loans, have decreased or increased less rapidly during the current economic crisis. The profitability imperative associated to the economic crisis leads firms to either obtain innovative strategies or to focus on exploitative innovation, such as, through the development generic products, creation of new firms that create generics and to invest in minor innovation thoroughly (Dunning, 2013, p.136; Laperche et al., 2011, p.1323).
3.3 The case of Europe
Pwc (2012, p.20) notes that reconciling the healthcare needs of the rich and poor is one of the biggest challenges the governments of the mature economies face. Nowadays, the governments and pharmaceutical groups focus on rising demand for higher-value medicines from wealthy citizens and call for better access to essential medicines from those in the lower socioeconomic spectrum (Pwc, 2012, p.21). In Europe, the strict fiscal rules led into an increasingly important constraint on the healthcare sector which that has as an addressee the consumers and consequently, the pharmaceutical companies (Pwc, 2012, p.27). European countries initiated health policy responses that signified changes to their health systems and raised concerns over the access in health between people from different social class backgrounds whereas unemployment was massively increased during the crisis (Karanikolos et al., 2013, p.1323).
In particular, countries in Europe had responded to the financial crisis in various ways. Within the EU, some countries such as the Czech Republic, Estonia, Italy, Lithuania and Slovakia were better prepared than others because of the fiscal measures1 adopted prior
1 Countercyclical policies, such as holding of financial reserves for health spending or linking of government
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to the crisis (Karanikolos et al., 2013, p.1324). In Belgium and Denmark, health budgets were protected and in the UK, they had frozen although actual expenditure decreased. Governments of Austria, Latvia, Poland, and Slovenia used the crisis to reduce costs, particularly in the hospital and pharmaceutical sectors as well they strengthened their position in price negotiations with pharmaceutical companies while Denmark, Greece, Latvia, Portugal, and Slovenia sped up the restructuring of their hospital sectors. Moreover, Cyprus, Greece, Ireland, Lithuania, Portugal and Romania decline the salaries of health professionals and in many cases employees in the pharmaceutical sector had affected (Karanikolos et al., 2013, p.1324). Drawing upon the regime theory which supports that decision-making procedures affect industrial structures through international institution it is important to note that member-states like Greece, Italy, Ireland, Spain and Portugal saw sever changes in their healthcare systems as a consequence of IMF΄S financial involvement in the countries which led into alterations of the pharmaceutical structure in the countries (Karanikolos et al., 2013, p.1324). The Greek government for instance, generated various healthcare reforms, including a restrictive reimbursement list, under its two “EU/IMF Memorandums of Understanding” and cost-saving measures involved the promotion of generics. Furthermore, some pharmaceutical companies announced their withdrawal from the Greek market as they claimed that they would not accept price reductions. The Italian government passed a ‘liberalisation’ law strengthening the rules on the use of generic alternatives. While Ireland proposed a draft bill permitting automatic generic substitution. Price cuts, high taxation and generic erosion are among the measures that have developed during the economic crisis as also the industry’s concerns in all of the European Countries (Deloitte, 2013, p.5).
Vogler et al., (2011, p.22) explain that pharmaceutical pricing and reimbursement systems in European countries differ from the other countries worldwide because of the overall organisation and funding of healthcare in which the pharmaceutical systems are embedded. EU’s countries are characterised by the obligation to grant access to essential medicines, for example, medicines that fulfil the priority needs of their population. For that reason, there is a great division between private and the public sector where during the crisis people that turned into the public sector had increased (Vogler et al., 2011, p.23). The Pharmaceutical coverage usually includes for the majority of the medicines dispensed in hospitals and medicines prescribed by the doctors. All of the EU member-states are obliged
27
under the Transparency Directive2 which aims at guaranteeing pharmaceutical pricing and reimbursement decisions to be taken in a transparent way (Vogler et al., 2011, p.23). However, individual countries decide how they organize their pharmaceutical pricing and reimbursement system. Price reductions of pharmaceuticals were among the main measures that member-states developed. Moreover, other measures included a change in co-payments such as an increase in cost for the patients, increase of the prescription fee and higher co-payment due to the lower reimbursement rates. Policy changes affected reimbursement lists and procedures and led into generic promotion measures while they raised concerns about medicines availability, especially for small national markets in European countries. Therefore, many initiatives included the promotion of generic use and the enforcement of policies for more rational use of medicines (Vogler et al., 2011, p.24).
The EC (2010, p.14) claims that the financial crisis increases competition3 for innovative medicines of the pharmaceutical companies. The economic recession led into problematic governance of the Member States, fiscal sustainability and the development of several legislative and non-legislative actions that altered the role of many of pharmaceutical companies (European Commission, 2010, p.5). The EU proposed that generic and biosimilar medicines need to be promoted by public and private payers as a consequence of the crisis and because of the uncertainty of the EU΄s economy due to the rise of the global competition on new pharmaceutical products (European Union, 2010, p.10). The introduction of pro-generic drug policy had impacted major pharmaceutical companies as doctors are being encouraged by the authorities to prescribe generic drugs (Coface, 2014, p.3).
2 The Transparency Directive of 2013 requires EU member states to respect minimum procedural requirements
when taking decisions concerning subject matters. Shortcomings in the coordination between the policy objectives and subsequent effects of national decisions by the EU in other Member States can lead into creating market distortions and endangering the predictability of the business environment for the pharmaceutical industry (ESMA, 2016; Vogler et al., 2011, p.23).
28 3.4 Conclusion of the chapter
The chapter found that industrial growth faced a reduction in many of the industries globally. The pharmaceutical industry is shown to be one of the industries that have been massively affected both globally and in the EU particularly. The crisis led into a reduction of R&D investment, fluctuations in the medications΄ prices, a reassessment of the healthcare systems and a further division between the public and the private healthcare sectors. Also, the crisis led into alterations in consumer preferences, a revitalization of generic products and an evolvement of domestic companies in the countries. Nevertheless, MNEs sustained their dynamic role in the international market because of their originality of their products and their investments in generic production which that also outlines Schumpeter΄s theory on innovative practises that are taken by firms during an economic downturn. By illustrating the nature of the global pharmaceutical sector and the distinction of the European case, it is now possible to move into the next chapter that demonstrates the effect of the global financial crisis and EU΄s influence on Cyprus΄ economy and the industrial sector of the country.
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Chapter 4
The Situation of Cyprus
The chapter aims to provide a brief background on the financial crisis in Cyprus and its effect in trade and the industrial sector of the country to examine how the financial crisis affects industrial structures. The chapter begins by offering a brief description on the economic crisis in Cyprus to provide an analysis on the impact of the crisis on the industrial sectors in the island.
4.1 Economic crisis in Cyprus
Cyprus became a member of the EU in 2004 under the Treaty of Accession to the EU3 as an attempt to reconcile a solution to the Cyprus Problem4. The membership included the provision for the suspension of the application of the acquis in the northern Turkish-occupied part of the island to be lifted when the island is reunited (Georgiou, 2013, p.56). In 2008, Cyprus became the fourteenth member state of the EU to join the Eurozone, adopting the euro currency and abandoning the Cyprus pound. The economic success story of the Republic of Cyprus from its independence year of 1960 along with its membership in the EU in 2004 seemed to be a great highlight of Cyprus political and social life; something that was soon proved to be oversighted and short-lived (Georgiou, 2013, p.57; Katsourides, 2016, p.62).
With the accession of the Republic of Cyprus to the EU in 2004 and the subsequent preparation to adopt the euro in 2008, numerous structural reforms were promoted, such as: the liberalisation of the market, increasing competition, the development of the financial
3 The Treaty of Accession to the EU of 2003 included Cyprus, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, Slovakia and Slovenia. Among the conditions of the treaty was the condition of the withdrawal of new member states from any free trade agreement with third countries (Ivanica, 2003, p.7).
4 In 1960 Cyprus received independence from Britain under three guarantees; Britain, Greece, and Turkey that
were to guarantee the independence, the territorial integrity, and the constitutional order of the Republic of Cyprus. Under a staged Greek military coup in 1974, Turkey invaded Cyprus and since then the island is divided; Greek-Cypriots have been living in the south and Turkish-Cypriots have been living in the north (Clerides, 1998, p.17).
30
sector and the enterprise sector (Clerides and Stephanou, 2009, p.28; Georgiou, 2013, p.57). For a number of years leading up to the economic crisis that began in 2012 in the country as a consequence of the global bank crisis, Cyprus was experiencing rising living standards, though the particular prosperity fell under pressure during the height of the global financial crisis through the reduction of the foreign demand in the country (Ioardinou and Samaras, 2014, p.65). Particularly, the domestic financial crisis followed by the scale of the global financial crisis was massively triggered by the island’s strong affiliation with the Greek bank sector (Georgiou, 2013, p.60). Specifically, in 2009 the Cypriot economy was adversely affected by the default of the Greek bonds where Cypriot banks shed large positions and were infected by the write-downs in the Greek Private Sector Involvement (PSI)5 of February 2012 (European Parliament, 2015, p.2). In response to the country’s deteriorating effects of the Greek debt crisis, the Cypriot government implemented measures to overcome the bankruptcy through cutting the cost of the state payroll, curbing tax evasion and revamping social benefits (Georgiou, 2013, p.61). However, these measures had proved insufficient and in June of 2012, Cyprus requested an economic bailout program from the European Commission, the European Central Bank and the IMF- known as the Troika or Eurogroup- of 17 billion euros.
Troika’s initial bailout response on Cyprus in March 2013 was characterised as political rather than economic (Clarke, 2014, p.99; Georgiou, 2013, p.62; Orphanides, 2014, p.244). German officials had questioned the necessity of bailing out a small island economy that represents no more than 0.2 percent of Eurozone output, arguing that such a small-scale sovereign default would not present a systemic risk to Eurozone (Georgiou, 2013, p.62). Hence, according to this claim, the stability of the entire Euro region would not be threatened and unlike a true sovereign debt crisis such as in Greece, Cyprus’ crisis was mainly a bank crisis (Georgiou, 2013, p.62; Ioardanidou and Samaras, 2014, p.64). However, since the Cypriot bank sector has always been a massive multiple of the Cyprus’s GDP, Eurozone
5 The Greek Private Sector Involvement refers to the second Greek assistance package of €130 billion by the
IMF which included private sector involvement (PSI) in a Greek government debt exchange. The net present value loss accepted by private sector bondholders was around 75% based on market pricing following the bond exchange (Reserve Bank of Australia, 2012, pp.30-31).
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agreed on providing 10 billion euros in bailout funds with an additional 5.8 billion euros to be generated by a haircut through a bank deposit tax6. The particular request resulted in significant pushback by various stakeholders and an unprecedented unanimous rejection of the initial bailout agreement by the fifty-six-member Cypriot Assembly. Deposits would bear the brunt of the haircut while almost half of the deposits were de facto from non-resident Russian citizens (Georgiou, 2013, p.63). Unlike other previous euro bailouts, Cyprus would not be given a debt haircut but a deposit haircut instead (Georgiou, 2013, p.63). Once Cyprus΄ Assembly rejected the initial bailout offer, the Eurogroup made it clear to Cyprus that it was up to the country to come up with the 5.8 billion euro bail-in part of the agreement. Cyprus then sought assistance from Russia and made an offer of either granting to Russian firms development rights to Cyprus’s natural gas and oil deposits, or to grant a naval base for Russia on the island. Given the significant stake Russian nationals and Russian firms had in Cypriot banks as well as the request of Russia to generate a naval base in the island in 2015, it was a surprise to many that Russia rejected all offers of Cyprus (Georgiou, 2013, p.64; Iskyan, 2015, p.8). Cyprus had thereafter accomplished a compromise with Eurozone with a revised deal7 as the turmoil of the situation affected not only the Eurozone, the EU, and Russia, but also markets as far away as the United States and Japan (Georgiou, 2013, p.65). The country finally signed the Memorandum of Understanding and the Memorandum of Economic and Financial Policies on April 2013, between the Authorities of the Republic of Cyprus, the European Commission and the IMF (Charalambous, 2015, p.22).
6 The bank deposits would take 6.75% percent from insured deposits of 100.000 Euros or less, and 9.9% from
uninsured amounts above 100.000 Euros. Cyprus would also raise the country’s nominal corporate tax rate which was the lowest in Europe, from 10.0 percent to 12.5 percent (Georgiou, 2013, p.63).
7 In the revised deal Cyprus agreed to the terms that all bank deposits of less than 100.000 would be guaranteed.
The Cyprus’s second largest bank the “Cyprus Popular Bank (Laiki)” would shut-down and deposits of less than 100.000 Euros would be transferred to the Bank of Cyprus. Cyprus also agreed to sell 400 million euros of its gold reserves and imposed further losses on Bank of Cyprus depositors and creditors (Georgiou, 2013, p.65).
32 4.2 Impact on industrial structures
It is argued (Charalamous, 2015, p.29; Regional Focus: The Levant, 2014, p.74) that Cyprus has been proceeded throughout a positive progress in the post-era of the economic crisis. Nevertheless, the great flow on the development of industrialisation of the island and the impact of the economic crisis on all of its industrial sectors are still discrete phenomena in the country (Roussos, 2014, p.24). However, the reformation of all of the industries in Cyprus was not only influenced by the financial crisis and the policy interpretations of Troika, but was also affected by the very nature of the industrial structures of the country before the crisis (Glushenkova and Zachariadis, 2014, p.63; Michael, 2015, p.5).
On the one hand, the strategic location of the island between Europe and Middle East, the well-educated workforce and the fast-recovering banking system are among the factors that reinforce the growth of the investment funds in Cyprus (Regional Focus: The Levant, 2014, p.74). Particularly, Gregoriadis -the head of the Cyprus Investment Funds Association, stated in 2014 (in Regional Focus: The Levant, 2014, p.74) that “Banks are deleveraging, and private equity funds are taking their place” and supported, that the recent legislation of the Memorandum could provide the possibility of enabling local corporations to be evolved and to face the lack of SMEs and corporate funding as it is one of the biggest obstacles to growth (Regional Focus: The Levant, 2014, p.74). Charalambous, who is also a Director of Financial Stability of the Ministry of Finance argues (2015, p.29) that the impact of the economic crisis on economic sectors is rather positive as an outcome of the restoration of confidence through the implementation of the reform agenda which was agreed with Troika -regardless of the some delays. In this sense, Charalampous (2015, p.29) explains the policy agenda reinforced the favourable external developments which support the tourism sector and the resilience of the business services sector. While government΄s officials argue that economic growth was remarkable during the years of the financial crisis by supporting that the GDP of the country returned to moderate growth, others (Clerides, 2014, pp.3-4; Glushenkova and Zachariadis, 2014, p.64) argue that this statement is rather questionable, as the GDP, the manufacturing and the industrial sector of the country have been facing a lot of fluctuations as a result of the economic crisis.
