JOINT VENTURE OR WHOLLY OWNED SUBSIDIARY? WHICH ONE TO CHOOSE TO ENTER CHINESE PHARMACEUTICAL MARKET: A MULTI-THEORETICAL FRAMEWORK FOR ENTRY MODE DECISION

JOINT VENTURE OR WHOLLY OWNED SUBSIDIARY? WHICH ONE TO CHOOSE TO ENTER CHINESE PHARMACEUTICAL MARKET: A MULTI-THEORETICAL FRAMEWORK FOR ENTRY MODE DECISION

Master thesis of International Economics and Business Faculty of Economics

University of Groningen

Supervisor: Dr. Gábor Péli Student Liu Changhong (1401548) Contact mail: liuch9980@hotmail.com

12

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August 2005

TABLE OF CONTENTS

ABSTRACT... 3

INTRODUCTION... 3

LITERATURE REVIEW... 7

R

EVIEW OF THE THEORIES

... 7

R

EVIEW OF THE ENTRY MODE FRAMEWORK

... 10

MULTI-THEORETICAL FRAMEWORK ... 12

C

OUNTRY

-

SPECIFIC FACTORS

... 14

I

NDUSTRY

-

SPECIFIC FACTORS

... 15

F

IRM

-

SPECIFIC FACTORS

... 16

METHODOLOGY... 17

S

AMPLE

... 17

Pfizer ... 18

GlaxoSmithKline (GSK) ... 19

AstraZeneca ... 20

Novartis... 20

Roche... 21

Wyeth ... 22

D

ATA COLLECTION

... 23

Measurements ... 23

Data Source... 25

EMPIRICAL CASE STUDY ... 26

G

OVERNMENT INTERVENTIONS

... 27

G

OVERNMENT REGULATIONS

/

POLICIES

... 30

M

ARKET GROWTH

... 33

C

ONSUMER PREFERENCE

... 35

S

OCIAL NETWORK

... 37

D

ISSEMINATION RISK

... 41

CONCLUSIONS ... 42

REFERENCE ... 43 APPENDIX 1: FIGURES ... ERROR! BOOKMARK NOT DEFINED.

APPENDIX 2: TABLES ... ERROR! BOOKMARK NOT DEFINED.

ABSTRACT

Departing from internationalization and entry mode theories, this study investigates the determinants of the entry mode decision, whether to choose joint venture or wholly owned subsidiary in particular, to enter Chinese pharmaceutical market. A multi-theoretical framework is developed for the entry mode decision.

Determinants categorized by means of nation-specific, industry-specific, and firm-specific aspects are elements of the framework. The framework is tested by a case study of six pharmaceutical companies that have launched into Chinese market since the open-door policy in the 1980s.

INTRODUCTION

The current challenge for pharmaceutical companies is to bring more drugs to the market, more quickly, at a lower cost. In fact, characterized as knowledge intensive, pharmaceutical industry has been challenged by dramatically increased R&D costs in the past two decades. For example, in the US, R&D costs in pharmaceutical industry were US 8 billion in 1980 and US 35 billion in 2001, which increased more than four times (DiMasi et al., 2003). Moreover, the time to develop a new drug has expanded from 11.6 years to 14.9 years (Javalgi & Wright, 2003). With the aim to achieving consistent development, a relative small number of large pharmaceutical companies tend to operate internationally. China has become a popular market to enter, which has been more attractive to foreign pharmaceutical companies after the economic reform since 1978.

The expenditure on health care in China has increased rapidly in the recent years. From

table 1, we can discover that the average growth rate of the expenditure is 13.5% in China,

much faster than the US and the EU countries. Although there is still a huge gap of the

absolute value between China and the industrialized countries, the consumer market is booming undoubtedly, giving rise to the development of the foreign pharmaceutical manufactures. Following the first foreign pharmaceutical company-Otsuka Pharmaceutical from Japan founded a manufactory in Tianjin, China in 1980; all the world top 20 pharmaceutical companies have established factories by the year 2004.

[Insert table 1 about here]

During the period from 1980 to 1998, foreign pharmaceutical companies basically chose either a joint venture or a wholly owned subsidiary entry mode (Jiang, 2002), which overwhelmed other entry vehicles such as export and licensing. Although wholly owned subsidiary stands for more control and more profits, most of them chose joint venture rather than wholly owned subsidiary: up to year 1998, 84% of the foreign pharmaceuticals chose a joint venture to enter Chinese market (Jiang, 2003). 13 out of 14 biggest ones, which are in the list of top 500 foreign companies in China, chose joint venture

¹

. Attributable to the current phenomena in pharmaceutical investment market in China, the research focuses on these two entry modes as objectives.

Despite the nuances in categorizing the entry mode, there are primarily three types of entry mode: export, contractual, and investment (Root, 1994), with the first two types discriminated by non-equity based mode, and the third one equity based mode. Each type is sub-grouped by some scholars. The attitudes towards sub-classification of the first two types diverge in views of different researchers. For instance, Pan and Tse (2000) argue that export includes direct and indirect ones, and contractual covers licensing and R&D contracting and alliances; Moon (1997) states that export can be divided into inter-industry and intra-industry trade, leaving strategic alliances and licensing to

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Resource: China Pharmaceutical Net, 8

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October, 2004.

contractual. As for the two objective entry modes of this paper, most of the researcher happen to have the same view: joint venture and wholly owned subsidiary are two sub-modes of investment (Pan and Tse, 2000; Moon, 1997; Malhotra, et al., 2003;

Gatingnon and Anderson, 1998; Kim and Hwang, 1992; Brouthers, et al., 1998; Delios and Beamish, 1999; Davis and Desai, 2000; Luo, 2001; Meyer, 2001). Joint venture is defined as a joint partnership in which major decision making is shared with the foreign partner; wholly owned subsidiary is 100% investment in which decisions are made solely by the investor (Moon, 1997). Therefore, joint venture is a low-control entry mode, and the wholly owned subsidiary is a high-control one (Luo, 2001 & Calevert, 1999). Up till now, I can give the definition of entry mode in this paper by referring to the definition in Calevert (1999): the mechanism and issues impacting upon the selection of an institutional arrangement of organizing and conducting international business transactions as low-control mode-joint venture (JV) and high-control mode-wholly owned subsidiary (WOS).

Ample theories about the internationalization provide the theoretical background in

understanding why the companies are willing to enlarge abroad. Nevertheless, it is hard

to build a unified conceptual framework that explains the internationalization process and

the entry mode. Bell (1996) asserts that the real world is so complex, and no single

approach can adequately encapsulate and elucidate all the factors that affect the choice of

the entry mode decision. Calevert (1999) assesses that “the entry mode strategy research

can be drawn together to provide a single model that firms considering to enter a new

market could utilize to aid and improve their decision making and choice of entry

vehicle”. It sheds lights on what I am going to do in this paper. To sum up the literature in

entry mode field, few literatures have been involved in the pharmaceutical industry,

especially in the Chinese market. There is no complete framework for entry mode

decision, which guides especially foreign pharmaceutical companies to do business in

China. Such a framework is necessary for two reasons.

Firstly, as mentioned above, Chinese market is becoming more and more important for multinational enterprises to achieve their internationalization goal. Foreign pharmaceutical companies are confronted with more barriers attribute to the particularities of the industry. Drugs are special goods because they are related with the life quality of the people. The end consumers often do not choose the drugs because they are usually prescribed by a doctor or recommended by pharmacy staff (Biniaris et al., 1999). Therefore, “it is not surprising that governments throughout the world have adopted an interventionist approach towards the industry, with the principal aims of raising standards of drugs safety, and reducing prices and the cost of drugs to health care bodies (Young, 1980).” China is in transition economy, regulations related with pharmaceutical sector and health care system are not perfect, which means the adjustments and modifications might come about simultaneously with the development.

Getting to know how these factors affect the entry mode decision is vital for the foreign pharmaceutical companies before their action.

Secondly, knowledge intensive is the most distinguished characteristic of the pharmaceutical industry (Javalgi & Wright, 2003). Typically, a new drug can cost hundreds of millions of dollars to bring to the market. In average, R&D costs account for 15%-20% of sales revenue in pharmaceutical industry, which have kept increasing dramatically since 1990s (Banik & Westgren, 2004). Holding this as the fact, the investors face up with the potential risk of losing the technology as a result of the weak intellectual property right protection in China. How to enter Chinese market with minimized dissemination risk is related with the superior performance.

The purpose of the paper is aiming to answer the above questions by synthesizing the

existing theories, selecting determinants that have relevant stronger power in affecting the entry mode decision in pharmaceutical sector, and then building a multi-theoretical framework for entry mode decision that is able to distinguish the two entry modes. By doing that, it is meaningful for the potential players’ reference and significant for existing competitors’ further investment and development. Furthermore, the research also sheds lights on what the Chinese government could do to construct an attractive and reliable investment circumstances in pharmaceutical market, regulating the market to develop towards a healthy and preferable direction.

The general research question of this paper is:

How do foreign pharmaceutical companies make the entry decision between joint venture and wholly owned subsidiary to enter Chinese market?

The specific research questions are as follows:

What kind of factors can influence the decision of the foreign pharmaceutical companies in choosing the entry mode?

Why is joint venture more preferable than wholly owned subsidiary? Are there any differences and specialties amongst pharmaceutical industry and others with respect to entry mode?

Is the entry mode decision dynamic or static? If dynamic, how the factors influence the decision inside the company?

LITERATURE REVIEW

Review of the theories

Theories of internationalization process and market entry mode include transaction

cost theory, strategic behavior theory, bargaining power theory, network theory, and

internationalization theory (Uppsala model), etc. First of all, I review the literature with

these theories in general. After that, factors that affect the decision of the entry mode in these theories are discussed and analyzed. I then select those factors contribute most to the foreign pharmaceutical companies’ entry mode decision in China. Finally, a multi-theoretical framework is developed to discriminate the two entry modes, namely joint venture and wholly owned subsidiary.

Transaction cost theory

The transaction cost theory belongs to the new institutional economics paradigm, in which the firm is viewed as the government structure (Williamson, 1985; Anderson &

Gatignon, 1986; Hennart, 1989). Transaction costs consist of ex-nate cost such as drafting and negotiating contracts and ex-post cost, such as monitoring and enforcement agreements. According to Williamson (1975), the entry mode decision of whether to use the market or hierarch depends on the trade-off between control (benefit of integration) and resource commitment (cost of integration) (Malhotra, 2003). If the transaction costs are high, a high-control entry mode is likely to be selected. If the transaction costs are low, the firms may favor a low-control mode (Hill et al., 1990; Madhok, 1997).

Strategic behavior theory

Knickerbocker (1973) observes that in an oligopoly industry, firms are prone to follow the decision of the rivals to minimize the risks under great uncertainty. Hence, the reason for enlargement abroad is not always to seek as rational as profit seeking. Firms also use this strategy to protect home market by waging competition through FDI. Another dimension of this theory is explained by Hount et al. (1982). They note that some firms prefer use multi-domestic strategy

²

, while other may favor global strategy

³

to enter the market. Other things being equal, only low-control is required for firms pursuing multi-domestic strategy. High-control is required for global strategy (Hill et al. 1990).

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Multi-domestic strategy: based upon the belief that national market differs widely with regard to the consumer taste and preferences, competitive conditions, etc.

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Global strategy: regards the global market as a whole market, regardless of the tiny difference.

Bargaining power theory

This theory asserts that the selection of the entry mode depends on the relative bargaining power between the firms and that of the host government (Boddewyn &

Brewer, 1994). A major source of the control power from the government is the access to enter the market and hand out or withdraw investment incentives. The main bargaining power of the firms stems from the ownership advantage (Luo, 2001). The bargaining power theory assumes that the firms typically prefer high-control mode of entry for high profits and protection of the property rights. On the contrary, the local government often negotiates with the investing firm, persuading them to adopt low-control mode with the aim of achieving technology spill-over effect or support local companies.

Network theory

According to this theory, exchange relationships evolve in a dynamic, complex and less structured manner. It is rather sociological than economic. Being the member of the society, sometimes kinship or friendship makes people behave irrationally. The focus of firm behavior is in the context of a network of interorganizational and interpersonal relationships (Coviello and Mcauley, 1999). These network relationships influence the entry mode, especially in China because of the culture and history. It is easy to understand that companies with sufficient network relationships are able to enter the market with less risk and more control. Otherwise, they would better choose to cooperate with a local company with knowledge of the relationships.

Internationalization theory

This theory is derived from Uppsala model (Johanson & Vahlne, 1977), and has been

tested in automobile and pharmaceutical industry in Sweden. Uppsala model, the

internationalization process is divided into four stages: no regular export activities, export

via independent agents, creation of an offshore sales subsidiary, and the establishment of

overseas production facilities. This approach describes the foreign entry as an incremental process, in which a multinational enterprise sequentially moves from stage to stage, involving a gradual increase in geographic and psychic distance as the time-dependent learning to do foreign investment. Dervillee et al. (2004) the increase of the commitment and control in the foreign market will take place while the multinational companies develop their foreign entry. That is to say, high-control mode is likely to come about with the step of the internationalization.

Review of the entry mode framework

Hill et al. (1990) develop a decision framework by combining transaction costs theory, internationalization theory, and strategic behavior theory. Their research focuses on licensing, joint venture and wholly owned subsidiary, distinguished by the extent to which control, resource commitments, and dissemination risk vary with each type of entry mode (table 2). Factors included in the transaction costs theory are the value of firm-specific know-how and tacit nature of know-how; regarding to internationalization theory, environmental variables such as country risk, local familiarity, demand conditions, and volatility of competition are selected; in strategic behavior theory, extent of national differences, extent of scale economics, and global concentration contribute to influence the low or high-control entry mode.

[Insert table 2 about here]

The main contribution of their research is it synthesizes not only the environmental and

transaction cost considerations, but also global strategic objectives into an eclectic theory

of the variables that influence the entry mode decision. Meanwhile, it develops three

dimensions to distinguish three entry modes, which can be regarded as the bridge

between the variables and the entry mode. The limitation of this paper is that the category

of the variable is not systematic since they seem to be confined by the boundary of the theories. Additionally, the framework is not tested by empirical study in this paper.

Another entry mode decision framework to be discussed here is built up by Calvert (1999). Theories of thought on the crucial factors are the transaction costs school, political/economic school, the process school, and the bargaining power approach school.

Determinants in this paper are classified into market factors (market efficient, level of information, market volatility, competition, and marketing), firm factors (transaction costs, goal congruence, dissemination risk, size, international experience, culture, and strategic plans), product factors (asset specificity and separability), national characteristics (cultural distance, uncertainty avoidance, and country risk), and host government factors (rate of growth of the underlying market, size of the proposed investment, and strength of the underlying industry sector). Entry mode is defined amongst international Greenfield investments, initial acquisitions, and equity international joint ventures. The first two modes are considered as high-control mode, with the joint ventures still as low-control. The value of the framework is tested in its application of the Japanese life insurance industry.

The deficiency of this framework is that the determinants are lack of theoretical

underpinning, which may lead to the ambiguousness in understanding. For example, the

transaction cost is referred as a theory in the literature review, however, in the framework,

it is shown as a factor in group of firm factors. In addition, host government factors are

treated as special step after all the factors are taken into account. In fact, they belong to

the national characteristics. The author is intended to emphasize the importance of the

host government factors because it is essential in Japan. Consequently, it is hard to say

that the framework can be applied as a general one.

MULTI-THEORETICAL FRAMEWORK

This paper employs the category of determinants defined by Luo (2001), which contains four groups: country-specific, industrial-specific, firm-specific, and project-specific. Project-specific aspect is not discussed in this paper, given that the investment in pharmaceutical industry is always not project-oriented. Thus, this study proposes that the selection of the entry mode in Chinese pharmaceutical market depends upon the first three groups of factors. Firstly, country-specific factors can be split into host country and home country (Tse et al., 1997). Since this paper studies “many to one”

situation of the market entry, it just focuses on home country environmental factors.

Factors include government interventions, government regulations/policies, political conditions, economics conditions, social-culture differences, technology conditions, geographic distance, etc (Jiang, 2003; Luo, 2001). In the emerging market in China, the government has the unrivalled power to control over the market, especially for pharmaceutical market, given that it is associated with life quality and high public concern. Therefore, government interventions and government regulations/policies are picked as country-specific factors.

Secondly, industry-specific factors such as sales growth, asset intensity, growth in

number of firms, consumer conditions, market efficiency, etc. have the influence on the

choice of entry mode (Jiang, 2003; Javalgi & Wright, 2003; Wei et al., 2004). As a result

of the distribution and diversity of the disease, the specificities of the consumer market

determine the strategy decision of the pharmaceutical companies. For example, Hepatitis

B is one of the major infectious diseases of mankind. The carrier rate of hepatitis B varies

widely, being uncommon amongst Westerners, China has 1.2 hundred million chronic

carriers, which accounts for One tenth of the total population and one third of the total

carriers in the world.

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Questions such as: how much percentage of the consumers prefers western treatment rather than traditional Chinese medicine; how much difference between the purchasing power in rural and urban area; whether the drug has monopoly effect upon the disease; whether the market keeps growing are principally important for pharmaceutical companies. Erramilli & Rao (1993) argues that the level of efficiency of the proposed market place is an important determinant. By market efficiency they mean the capability and cost effectiveness of the market in providing vital goods and services to the new firm in order that it may provide its own product to market. Given the particularities of the pharmaceutical industry, market size and growth, consumer preference, and market efficiency are chosen in this paper.

Lastly, firm-specific factors are from micro perspective way of thinking. Entry mode choice is relevant to social network, dissemination risk, strategic target, host-country experience, etc (Malhotra et al., 2003; Calevert, 1999; Luo, 2001). With the fundamental character- knowledge intensive, sometimes the foreign pharmaceutical companies are desperate to see their products being imitated by local pharmaceuticals. That is the reason why many pharmaceuticals only locate the medicine that is over or near upon the patent expiration into Chinese market. Besides, social network, known famous as “guanxi” in Chinese, constitutes as a distinct feature in entry mode decision. Social network and dissemination risk are two factors in this category.

The next section details the propositions about the effects of the entry mode decision of the seven factors mentioned above on the decision of the entry mode in Chinese pharmaceutical market. The decision in this paper is binomial study, so that choosing one entry mode implies the inverse selection of the other and vice versa. In the meantime, a multi-theoretical framework is constructed with each factor reflected by certain theory.

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Country-specific factors

Government interventions

The driving forces for government intervention that discourages foreign investment are either to protect local industry, or to regulate and control the market. Consistent with bargaining power theory, when the investment disincentive intervention is high, a cooperative entry mode is more valuable to investors. In a transition economy like China, where sometimes the interpersonal relationship is very helpful to bargain with the government, it is wise to have a Chinese partner with local experience and knowledge to negotiate with the government.

Proposition 1: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the investment disincentive government intervention is high.

Government regulations/policies

Drug manufacturing is under strict supervision in every country, and each country has

its own specific regulations/policies. They are formulated with a view to enhancing the

supervision and control of pharmaceuticals, ensuring the drugs’ quality, improving their

curative effects, guaranteeing safely in medication and safeguarding the health of the

people. Again, joint venture is favored when these restrictions are high since with local

partners, the extend to which the foreign companies are able to understand and implement

the regulations/policies will be improved. Bargaining power theory is applied here as

well.

Proposition 2: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the level of government regulations/

policies is high.

Industry-specific factors

Market size and growth

Wholly owned mode with full control is always favorable to the investors. Seeing at pharmaceutical industry, the economies of scale decreases the production costs dramatically because once a new drug is put into production, the marginal cost is tiny compared to the huge R&D costs, which can be regarded as sunk costs. This integrated mode contains high control, high profits and high risk. In an expanding market, foreign companies always expect to introduce more products and gain more profits in accordance with internationalization theory. Therefore, they are more confident to develop, which might compensate the probabilities of the risk.

Proposition 3: Other things being equal, foreign pharmaceutical companies prefer wholly owned subsidiary to joint venture if the market is expanding dramatically.

Consumer reference

With the population of 1.3 billion, the Consumer conditions are complex in China.

Consumer preference is essential for the decision of the entry mode. Competing with traditional Chinese medicine, western medicines are lack of consumer loyalty and history.

Mode of joint venture has the advantage in enhancing the reliability and persuading patient to change the habit of using the medicine.

Proposition 4: Other things being equal, foreign pharmaceutical companies prefer

joint venture to wholly owned subsidiary if the target market’s consumer

preference is hard to be changed.

Firm-specific factors

Social network

Derived from network theory and related with bargaining power theory, the social network is especially crucial for foreign pharmaceutical industry, given that there are more entry barriers in this industry. As a result, it is always wise to cooperate with a local company as the initial entry mode if the investor does not have enough host-country experience.

Proposition 5: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the companies are lack of social network.

Dissemination risk

Pharmaceutical industry is knowledge intensive, with high degree of tacit knowledge.

Investors must minimize dissemination risk as a kind of transaction cost. To protect the technology from being imitated constitutes one of the managerial tasks for success. The full ownership mode is better to protect the tacit knowledge and strategic resources than the cooperate one. Dissemination risk is worthy to be discussed in Chinese market as the intellectual property right protection is weak, which is a serious problem that has to be solved after China joins WTO.

Proposition 6: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the dissemination risk is high.

So far, six determinants from three aspects have been discussed, with each of them

underpinned by one theory except consumer preference. They are powerful factors that

influence the trade-off between joint venture and wholly owned subsidiary, chiefly for

both existing and potential foreign pharmaceutical companies in Chinese market. A multi-theoretical framework for entry mode decision is then able to be formulated (figure 1). Evidently, these determinants are far from being complete for company’s reference if we think about the complexity of the real world. The principle of constructing this framework is to seek the relatedness between determinant and theory, synthesize the theories, and apply them as a whole in the chosen atmosphere. It is also expected that the pharmaceutical companies may find the determinants helpful for entry mode decision.

These are the main contributions of the framework. The next section is to outline the case study and test the framework.

[Insert figure 1 about here]

METHODOLOGY

To test the framework and further answer the research questions, a case study with a sample of six foreign pharmaceuticals is adopted. First of all, why and how a particular company is chosen is explained with a profile in terms of investment. I then interpret the measurements of each factor and where and how to obtain the data in data collection section. Finally, strategies to analyze data and a description of how the design and data acquisition process I have made are detailed.

Sample

The sample consists of six foreign pharmaceutical companies that have established

manufactories in China since 1980s. They are: Pifzer, GlaxosmithKline, Astrazaneca,

Novartis, Roche, and Wyeth. They are selected based on three standards. First of all, they

are big multinational enterprises all ranking in “world top 20 pharmaceutical company

list” from year 2000 to 2003 based on sales revenue. From table 3, the ranking position of

each company is relatively stable besides the influence from merge and acquisition, which may lead to notable increase of one company’s revenue and vanish of another. The list implies that companies with outstanding performance have the capabilities to develop consistently and stably, so that they are more significant to be studied.

[Insert table 3 about here]

Secondly, these 6 companies are from the top 20 list entered Chinese market in different time span. In different time period, the political and economic conditions vary in China, which might affect the entry mode choice. Consequently, 3 companies came in China in 1980s, 2 in 1990s and 1 in 2001 are chosen as representatives. Lastly, firm-specific factors matter to make the final decision. I attempt to use the limited sample to cover the diversified situations in pharmaceutical sector to test the framework. Hence, each company should be efficient distinct from the other. For instance, Pfizer and Glaxosmithkline are two giants in pharmaceutical industry, both with successful mergers in the past five years. Astrazeneca and Roche have not only settled down factories, but also invested in research and development agencies in China. Obviously, with such an expanding strategy, the entry mode may change in the near future. Novartis has good public image and favorable government relations. It is interesting to know how they chose the entry mode with extra attention to the specific situations in China. A background introduction with further distinctions is detailed in the company profile.

Pfizer

Pfizer is a giant in pharmaceutical industry with largest sale revenue around the world

currently. Pfizer established its manufactory in Dalian, Liaoning province in 1989. With

over US$ 500 million investment, Pfizer employs more than 1,300 in Beijing

Administrative Center, manufacturing facilities in Dalian, Suzhou and Wuxi as well as

over 50 representative offices throughout China. The three factories are joint ventures,

with the ones located Suzhou and Wuxi turned into Pfizer’s entities after the merger with Pharmacia in 2003. Furthermore, Pfizer (China) Investment Co., Ltd was enrolled in Shanghai with registered capital US $175 million, which is a wholly owned enterprise.

Pfizer is dedicated in improving Chinese people's healthcare and treatment levels by introducing the leading innovative medications. In the meantime, Pfizer also plays its cooperate citizenship in the community where they work and live. The efforts Pfizer has put into public relations and social responsibility lead to the favorable government relations and superior reputation in China. Pfizer has probed their own way to deal with government regulations affairs so that a satisfying and helpful social network has been set up. After achieving these performances, Pfizer has added investment in China from US$

30 million to US$ 500 million in the past ten years, aiming at enhancing the proportion of the capital in its joint venture. In contrast to initial foreign share as 55% in Dalian factory, the percentage has increased to more than 95% at present. Undoubtedly, Pfizer is changing the entry mode gradually as their Chinese experience accumulates.

GlaxoSmithKline (GSK)

Headquartered in the United Kingdom, GSK has become the second largest research-based multinational pharmaceutical company since the completion of the global merger between Glaxo Wellcome and SmithKline Beecham in December 2000. It has leadership in four major therapeutic areas: anti-infectives, central nervous system, respiratory and gastro-intestinal. In China, prescription medicines and vaccines are headquartered in Shanghai, over-the-counter (OTC) Medicines is headquartered in Tianjin, and Consumer Healthcare is headquartered in Hong Kong.

With total registered investment of US $ 278 million and employees over 2,800

nationwide in China, GSK is one of the first foreign pharmaceutical companies to

establish successful joint ventures in China with first factory established in 1984. To date,

GSK has established five manufacturing facilities and one investment company. Four of them are joint ventures and the other two are wholly owned subsidiaries. GSK is a superior case to indicate how the foreign pharmaceuticals make the entry decision. From table 4, it can be noticed that GSK not only attempted to increase the foreign investment proportion, but also change the entry mode from low control to high control mode as the investment activities carry through.

[Insert table 4 about here]

AstraZeneca

AstraZeneca is formed by the merge of two pharmaceutical companies: Astra, based in Sweden and Zeneca located in the UK in 1999. As a late entrant, what AstraZeneca has carried out is distinct from foreign competitors: it established a manufactory in Wuxi, Jiangsu province with investment of US $134 by choosing wholly owned subsidiary in 2001; it also set up a clinical research unit in Shanghai in 2002. These are bold decisions since the investment amount exceeds that of the GSK and Pfizer and the initial entry is with 100% foreign capital. Meanwhile, there are only four foreign pharmaceuticals that have built up R&D center in China, AstraZeneca’s R&D center just came into being one year after of the first step in China without any hesitation, which makes AstraZeneca very special. It is obvious that AstraZeneca has shown its extreme enthusiasm and confidence of Chinese market, however, what are the lessons and achievements with the full control entry decision deserves to be studied.

Novartis

Headquartered in Switzerland, Novartis was created in 1996 as a merger of two Swiss

chemical/pharmaceutical companies: Sandoz and Ciba Geigy. Novartis came to China in

1987, and has set up four companies in Beijing and Shanghai with total investment

approximately US $100 million and more than 1,500 employees. The investment is

distributed equally in its four companies, which involves ethical medicine, consumer health care, ocular treatment, and animal health care products.

Novartis appears to be cautious when making the entry decision. Table 5 illustrates that although Novartis has been in Chinese market for 18 years, the investment amount has not increased dramatically. Instead, the entry mode is confined to joint venture with comparatively stable investment amount and share besides Novartis (Shanghai) Shi Kang Contact Lens Co., Ltd., which is a wholly owned subsidiary based in America. Moreover, unlike other pharmaceutical giants, Novartis’s business is more diversified. What the multinational pharmaceuticals usually adopt concerning entry strategy is to build up companies in accordance with the characteristics of the medicine, however, Novartis is involved not only in medicine, but also in some related products and it separates the companies based on the product type.

[Insert table 5 about here]

Roche

Headquartered in Basel, Switzerland, Roche is one of the world’s leading

innovation-driven healthcare groups. Its core businesses are pharmaceuticals and

diagnostics and it was the biggest Vitamins producer in the world. Entering Chinese

market in 1994 with the first factory established in Shanghai, Roche has been participated

in many cooperative activities in this area. In total, eight joint ventures and three wholly

owned subsidiaries have been active in Roche’s Chinese investment history (see table 6),

and the totaled investment amount has climbed to US $ 275 million. Due to the dispersed

investment strategy, the capital proportion in each company is not very much compared

with other big pharmaceuticals. However, we can still find the trend of moving towards

the high control mode in Roche.

Amongst the six cases in the paper, China Roche experienced the most striking structure change. In 2002, the profits of Roche turned to minus Swiss Kr. 4 billion globally. Being awake from the nightmare, Roche decided to concentrate on its core comparative sector, pharmaceuticals and diagnostics and sold out other sectors. As a result of sold out and merger decisions, up to 2005, only two joint ventures and three wholly owned subsidiaries left in China. Although the big change might not relate to the performance in the Chinese market alone, as an important target investment market in which most of the Roche’s businesses have been settled down, Roche China is a good sample to explore. After recovery from the slump, Roche set up the fifth global R&D center in Shanghai in 2004, which is an evidence for its enthusiasm of China.

[Insert table 6 about here]

Wyeth

Wyeth has two investment projects in China: Wyeth Pharmaceutical Co., Ltd. founded

in 1991 with a total investment of US$ 29.9 million and Shanghai Wyeth Nutritional Co.,

Ltd established in 1995 with total registered capital of US$ 24 million is Suzhou, Jiangsu

province. The former investment project was a joint venture in the beginning and was

called “Su Zhou Li Da Pharmaceutical Co., Ltd”. It is a factory for prescription drugs. In

2000, Wyeth bought the share from its Chinese partner with the payment of US$ 11

million thus the investment added up to US$ 29.9 million. After that the company in

Shanghai developed into a wholly owned one. Wyeth Nutrition is a joint venture with

Shanghai Guangming Dairy. All drug from this factory are over-the-counter and the

conspicuous profit point is from Caltrate D with main ingredient of calcium carbonate for

different consumer groups. Due to the important of this project in China, Wyeth nutrition

reports directly to its headquarter in the US.

Data collection

Measurements

There are two layers of the measurements to test the propositions. The first layer is the descriptive data that offer the basic situations and currant status of the chosen industry.

The second layer gives details of how each company fulfils the investment activities relevant to the factors in the framework. Data explaining what have happened in terms of each factor in the company, how the companies deal with the entry affairs generated from the change of the factors, and how they consider the entry mode decision is influenced by internal or external shocks are intended to be known. By doing that, a dynamic process of the entry mode choosing will be presented so as to answer the research question. The two layers are not separated since they both cover the factors in the framework. Thus, they will be embedded together to tell an integrated story.

Kely M. (2003) finds that price control has a statistically and quantitatively important effect on pharmaceutical launches. Therefore, price control is considered as the main intervention in pharmaceutical industry given that the government is the biggest buyer of drugs. Government regulations/policies are measured by Pharmaceutical Law enacted by the government and reimbursement list of drugs in the health care system.

Pharmaceutical Law is a law to standardize pharmaceutical R&D, production,

distribution, and usage. The relevant part of the law is the one for drug manufacture

enterprise, with Good Manufacture Practice (GMP) as the key criteria. The reason why I

fosuc on reimbursement list in health care system is that only the money spent on drugs

in the list can be refunded to the patients, therefore, in a competitive market, patients who

cannot afford the “out-of-list” drugs would like to choose giving up the treatment or

searching for possible substitutes so that the sales of those drugs will be definitely cut

down.

For the industry-specific factors, medicine market is divided into two groups: ethical medicine, which can only be purchased by doctors’ prescriptions, and over-the-counter medicine (OTC), which consumers can obtain from pharmacies. Market size and growth is measured in accordance with the status of these two groups. At last, the western drugs have to compete with traditional Chinese medicine given that the latter has been practiced for over 2,000 years and still forms an important part of healthcare in China (West, 1997).

It is not easy to change the habit to use the medicine so that the consumer preference is crucial for foreign companies. Consequently, consumer preference is discussed with the comparison of the market share between traditional Chinese medicine and western medicine with chiefly same effects and the evolution of the drug using habits in China.

The rest two factors are rather at micro level. Doing business in an oriental country is always difficult for western countries due to the different cultural dimensions. In China, the most relevant aspect is the art of the relationship, known as guanxi. For foreign pharmaceuticals that are confined by so many government institutions such as State Economics and Trade Committee, SDA, Price Ministry, Society and Labor Security Ministry, the disfavor of these institutions can cripple their business. To develop a favorable government relation is crucial for foreign pharmaceuticals. Functions and performance of these departments are measurements of social network of the companies.

The last factor is dissemination risk. The measurements of the dissemination risk are how

easily the techniques could be counterfeited and the R&D costs. The more easily the

drugs can be copied by domestic producers and the more of the R&D costs, the more

dissemination risk will be. Foreign pharmaceuticals are afraid of introducing novel drugs

into Chinese market because the capacity of counterfeiting is very powerful. Due to the

lack of R&D expenditure, 97% of domestic products are from copying. Moreover, the

loose enforcement of the intellectual property right encourages the copying of the drugs

illegally.

Data Source

For the first layer data, country-specific measurements can be obtained from law clauses, provision terms and books, and those of industry-specific are able to get from statistic records of Ministry of Foreign Trade and Economics Cooperation and China National Pharmaceutical Foreign Trade Corporation. Firm-specific data are supposed to be gained from company website, internal magazine, relevant books and news. To collect the second layer data, making interviews is the dominant method.

An interview plan is designed and each company is examined with respect to its investment characteristics and experience. As for the determinants in the framework, I expect to find support for the propositions in the case study. It should be noticed that not every single case covers all the factors when the decision makers make up their minds.

Therefore, the six cases are rather substitutes in the proposition testing. Interviews are regulated in a bottom-up sequence. As the first step, junior workers and sales are interview objectives. From them, a general outlook of the entry mode decision can be achieved. Furthermore, managers in relevant departments are interviewed.

For the first, second, and fifth proposition, interviewees are chosen from government/public relations department since they are most likely to get involved in government affairs and public relations. Getting to know the details of the third and forth proposition, I choose interviewees from marketing or sales department for the reason that these factors are market oriented. At last, dissemination risk is related with R&D department. However, the measurement is R&D cost, which is possible and rather easy to get from secondary data. Additionally, two companies in the sample have established R&D center in China, which might have a divergent influence on the entry mode decision.

Two interviewees in Astrazeneca and Roche in R&D department are selected accordingly.

Furthermore, how to lobby with the government, persuade them to put more effort to

enforce the intellectual property right law are the tasks of government/public relations department as well. For this reason, questions related with this proposition are requested in both R&D department and government/public relations department. Names and positions of the interviewees are specified in table 7.

[Insert table 7 about here]

The following section is the question package in the interviews. Interviewees are from three departments irrespective of the same function with different name. Three packages are detailed with general questions that will all be asked in each company. Nonetheless, every single company has its unique characteristics that have crucial influence on entry mode decision. How they differ is mentioned above in the sample part. Specific questions for certain company are not pointed out here not only due to the complexity, but also because the questions will be adjusted and created accompanying the investigation process.

EMPIRICAL CASE STUDY

In this section, six propositions are tested by the empirical case study from sample companies. The sequence of the testing is categorized in accordance with the proposition.

First of all, I introduce the background situation of each proposition in China, and after that, empirical case of each company is mentioned, compared, and discussed in order to examine the propositions. Without sepecific mentions, results are gained from every sample company, and the sequence of the empirical study is Pfizer, GSK, AstraZeneca, Novartis, Roche and Wyeth. The results from each company is generalized in table 8.

[Insert table 8 about here]

Government interventions

Proposition 1: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the investment disincentive government intervention is high.

Current status

In China, the pricing system contains government guidance price, government fixed price, and market adjustable price. Price control exists in the first two methods. The principal of pricing is declared to offset the costs and gain reasonable profits for the producer; reflect market demand and supply; embody the difference in drug’s quality and effect, and encourage innovation. After calculating the price of a new product, the company will declare the price to the Price Ministry. If the price is approved, the new drug can be put into the market. Foreign producers are treated the same as the domestic counterparts, but the profit point for foreign pharmaceuticals is mainly in the region of price control, which makes the pricing comparatively important for them.

Although the pricing system appears to be quite stable simply, direct and compulsory pricing cuts have happened ten times since 1998. From 1998 to 2000, six drug pricing cuts involved roughly 300 varieties, with the total amount added up to RMB 8 billion Yuan and average cut scope of 15%. In the following cut from year 2001 to 2005, the depreciating expanded to a wider range, summing up to RMB 12 billion

⁶

. According to a forecast from State Development and Reform Committee in May 2005, another round of pricing cuts will happen soon. The average expected depreciate rate is more than 60%

especially for anti-infectious medicine, and will become a record breaking. As a summary, the degree of price control has been enhanced in China, with the turbulence of price description now and then.

6

Chengdu Daily, 8

^th

June 2005.

Results. From the interviews, six companies all confirmed the fact that price control in China effects more on OTC drugs than prescription ones because the latter contains more technology and hence companies have more freedom in pricing. The disincentive intervention from the government is dramatic in OTC drugs: when pricing the drug, the government will refer to the national made counterparts with the purpose of protecting them and widening the drug coverage for the poor. It hurts the foreign pharmaceuticals since costs are usually higher for them.

The situation is Pfizer and Roche is less alarming because both have no OTC drug in Chinese market. As for GSK whose fist products are mostly OTC, the interviewee complained that they have to compete with small companies in which the costs are much lower. GSK is pride of their better quality, but Chinese patient sometimes just focus on price without noticing the quality difference, which makes GSK very headache.

AstraZeneca and Novartis were hurt less because it has only one OTC drug, and the prescription drugs are all developed inside the company. In Wyeth, a drug for reducing fever and analgesic failed in entering Chinese market because the price is too high to be accepted by Price Ministry. The issue is still pending because none of the both sides is willing to compromise.

With the pricing cut issue, every company had sufferred from it. Unlike price control,

both OTC and ethical drugs are targeted. The type of drug that is depreciated most is

anti-infectious ones. The price cutting range differs from 20% to 93% depends on the

quality and original price of the drug. Pfizer and Roche both have anti-infectious drugs,

with which Roche makes considerable profits. In the storm, Pfizer’s Sulperazon and

Roche’s Rocephin were cut around 20% of the retailing price, which harm them but not

badly with the lowest cutting range. Interviewees from these two companies both agree

that except inner reasons, the relationships with the government is crucial for debating how much price to cut, and the joint ventures are much easier to get the satisfying solutions than the wholly owned ones because of some supporting regulations and intimate relations with the government.

GSK’s profits have been cut badly. The price of OTC keeps declining under the pressure of the government even without considering the inflation rate. The market director of GSK says:

“The profits of our company, especially in Tianjin factory whose produtcts are OTCs were cut dramatically because most of the OTCs are not novel drugs, which means they are most likely to be in the pricing cut list. GSK is still facing the price crisis, and it is like a knife hanging above the head because you never know when it is going to cut you.”

AstraZeneca, Novartis, and Wyeth were influenced less during the storms. AstraZeneca

was protected due to the lack of depreciation drugs. Novartis has some monopoly power

over its fist products, over which the government has less control power. Wyeth protected

itself by achieving some “favorable treatments” from the government although the price

of its profit point- Caltrate D is bit too high compared to the others. State Development

and Reform Committee decides the price of which drug should be lowered. In China, the

official standard of cutting the price is to make the basic health care possible and thus

benefit the public. But when it comes to implement, loophole and grey area emerge

inevitably. There is a wide range for the expert group in the Committee to decide which

drug or in which company the price should be lowered. In Wyeth, besides the good drug

quality, public relation department contributed dramatically to instant the relatively high

price of their products. An interviewee from Wyeth Nutrition

⁷

says:“Wyeth insisted the price during the storm partly owing to the good public image and government relations established by public relation department.”

Analysis. To analyze the results from sample companies, a proposition will be considered to be verified if the entry mode is inclined to be joint venture with more influence from the price control and pricing cuts in the company, and vice versa. As the top pharmaceutical, situation in Pfizer is a bit complex: government intervention disturbs Pfizer to some extend with the declining trend and the entry mode is developing towards the one with more control. GSK is hurt most in its OTC company, therefore, the joint venture character of Tianjin company remains. AstraZeneca and Wyeth have not been influenced as much as the rest, in accordance with the proposition, the entry mode is wholly owned. In Novartis and Roche, government intervention shows a moderate extend in influencing sales and profits. Accordingly, the entry mode reveals a dynamic trend:

changing from joint venture into wholly owned. This trend shows an inverse result against the proposition in Novartis and Roche. As a whole, majority cases are consistent with the proposition.

Government regulations/policies

Proposition 2: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the level of government regulations/

policies is high.

Current Status. Government regulations/policies are measured by GMP in Pharmaceutical Law and reimbursement system in health care system. China started implementing first GMP in 1988 and amended it in 1992. In 1998, Chinese State

7

Position and name not mentioned due to the requirement from the interviewee.

Department established a new drug supervision and management institution-State Drug Administration, with the aim of centralizing and streamlining regulatory authority. The function of the SDA is similar to the FDA in the USA. In 1999, GMP was edited by SDA for the first time and from then on companies need GMP authentication have to apply to SDA.

Currently, China maintains both a national and a provincial set of reimbursement list constituted by Society and Labor Security Ministry with branches in every province and municipals that have 10% “local adjustment” power over the list. The idea is: the central decision is made according to the demand of the market with optimal price from macro aspect of the country, leaving the adjustment range for the local government in accordance with the economics situation and disease specialties in the region. Most foreign companies have found the “list” to be both tightly regulated and inconsistent with the fact that the drugs included on the national list are not all consistent with regulations, which give rise to negotiation rather than regulation. After the first trial in Zhenjiang and Jiujiang in 1994, the new medical security system has been implemented in some cities, but not the entire country, and the “list”- one of the symbols of the new system has been changed to be more mature than ten years before. As a summary, we can observe the increase level of the regulations in China with the growth of foreign pharmaceuticals.

Results. Although just a small proportion of the pharmaceuticals have achieved GMP certificate in China, sample companies have all achieved GMP certificate before producing drugs. For foreign companies, GMP is a very basic level in manufacturing.

Even though the GMP regulations are getting stricter, the standard of Chinese GMP is still looser than that in developed countries.

Results concerning the second measurement are gained in five companies except

AstraZeneca. In Pfizer and Roche, some of the novel drugs are not in the national list because of the high price and the existence of the cheaper substitutes. The strategy for them is to put some indications to the list if the drug itself is not able to enter. For instance, Cellcept is the most important product of Roche that can protect the organ rejection in patients receiving renal and cardiac transplants. Only patients who receive renal transplants can get reimbursed from the list, which at least helps the sales of the products. GSK bothers least from the “list” issue because all of its OTC drugs are in the list. The strategy in Novartis is to guarantee the new products to be in the list. But in reality, many of them are still waiting to get the permission. Davion is a fist product of Novartis, but it is not in the most important regional list in Beijing and Shanghai, which hindered the sales remarkably.

In Wyeth OTC, most of the products are not in the list due to the sky-high prices: up till now, only Caltrate D and a cough-relieved drug- Robitussin are in the list. In prescription part, a depression and anxiety disorders relived drug with brand name EFFEXOR XR is distinct as the fist product of Wyeth with US$ 3.4 billion sales revenue in 2004 globally. This drug is the profit point in China as well that is in the national reimbursement list. The strategy of the foreign pharmaceuticals is to let the fist products be in the national list first, insuring the 90% chance to be in the list, which declines the chance to deal with the local government if the drug is not kicked out of the list by them.

Following the strategy, Wyeth put a lot of efforts to keep fist products such as Caltrate D and EFFEXOR XR in the national list.

Analysis. Pharmaceutical Law is not meaningful to be discussed since it makes no

difference amongst the samplel companies. By combing the entry mode and the results

from the interveiew, with the higher level of the regulations/policies, GSK and Novartis

keep the joint venture in their main region. Pfizer and Roche indicate a trend of changing

the entry mode. Therefore, the influence of this factor is considered to be moderate. In Wyeth, the result is opposite to the proposition since with the stricter regulations, and Wyeth’s entry mode is wholly owned subsidiary.

Furthermore, I find that there are definitely some actions “under the table” to make the ad and high price endurable by the SDA and the Society and Labor Security Ministry. For the detailed dealings, the interviewees either said not knowing, or refuse to answer. But at least one thing is clear: to develop and sustain a good relationship with the governmental institutions by local people and knowledge is indispensable. Besides, the interviewees all pointed out that to enter Chinese market, the investment regulation is the key factor. In 1990s, in order to attract FDI and drug national industry, Chinese government offered many favorable policies such as first two years taxation free and next following three years taxation reduced for foreign companies to form joint ventures with local companies.

After the 5-year favorable policies expired from the first investment, Wyeth started to eat the Chinese share with an ownership-changed scheme. In GSK, to keep investment form as joint venture is still in favor of some regulations. For example, each year, there is a reward for “double intensive

⁸

” joint venture pharmaceutical company, which can cut millions tax for the company. Wholly owned ones never get chance to reach this award.

As a summary, the proposition is supported in 4 companies out of 5.

Market growth

Proposition 3: Other things being equal, foreign pharmaceutical companies prefer wholly owned subsidiary to joint venture if the market is expanding dramatically.

Current status. China's pharmaceutical market has expanded dramatically in the past two decades, averaging between 18 - 20% growth, significantly higher than US and

8

Double intensive means technology intensive and human resources intensive.

European growth during that period (7 - 9%). The ethical drug market valued at over $6 billion and the over-the-counter drug is currently valued at over $1.2 billion and is estimated to reach $5 billion by 2010. According to findings published in the 2004 China Medical Market Report, China’s pharmaceutical market will continue to experience double-digit growth rates after five years as domestic companies become more efficient and the escalating investment from international pharmaceutical companies. Currently, the usage proportion of domestic produced foreign drug accounts for 25% as an average rate in China, and the rate is around 35% in metropolitan cities.

Results. Roche, Novartis and AstraZeneca have marked China out as a real growth opportunity, predicting that China will be among their top five most important markets by the end of the decade. In the past five years, the average growth rate of sales revenue is 26% in Pfizer

⁹

, 17% in GSK

¹⁰

, 30% in Novartis

¹¹

, and 13% in Wyeth

¹²

. In addition, the total growth rate from AstraZeneca including the import drugs is 40% after the remove of the import restriction in 2004

¹³

. In Roche, due to the equity transfer, the total amount of sales has fallen, but within the diagnosis part, the sales revenue keeps a rising rate of 20%-30%

¹⁴

.

Analysis. From these facts we can find that with the dramatic expanding of the market, entry mode has been changed in Roche, GSK, and Wyeth with the first two building another factory as wholly owned subsidiaries in 1997 and 2000 and Wyeth buying local share from its partner in 2000. This linkage is more conspicuous in AstraZeneca since the original entry mode is wholly owned accompanied with the highest growth rate among

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http://www.nanfangdaily.com.cn/southnews/tszk/nfdsb/spzk/200404080591.asp

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http://www.people.com.cn/GB/14739/26466/32821/32822/2423787.html

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http://health.people.com.cn/GB/30830/30834/3216424.html

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http://health.qianlong.com/29/2005/03/31/1280@2576322.htm

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http://gov.finance.sina.com.cn/zsyz/2004-08-13/21125.html

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http://www.cmt.com.cn/article/041223/a0412232401.htm

the six. Pfizer is an exception because although the market is seen to expand, the entry mode has not changed in company’s history. The reason for that is tangled: Pfizer is the biggest pharmaceutical in the world, which attracts more attention when it entered China’s market. As is said in a Chinese idiom “the gun will shot the bird which comes out first from the group”, Pfizer has been the focus of the public and the government, which brings some extra troubles to launch Chinese market.

Consumer preference

Proposition 4: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the target market’s consumer preference is hard to be changed.

Current status. Using Traditional Chinese medicine is a tradition in Chinese society as a legacy inherited from the ancestor. In Chinese society where the philosophy is deeply influenced by Confucianism, tradition is hard to be changed and is highly respected. An investigation from AcNielsen reveals that the older consumers’ preference for traditional Chinese medicine is 10% higher than juniors. Hence, to compete with tradition is a challenge that the foreign pharmaceuticals have to face up with. The assumption is that the challenge only exists when two types of medicines are substitutes and the patients have the chance to choose. On the other hand, besides tradition, the discrimination of traditional and western drugs is due to the subjective preference of the consumers.

Consequently, traditional medicine companies hold good public praises as the comparative advantage to run their business. How to change the consumer preference effectively is hard to fulfill without getting to know the background information. The easy way to reach the goal is to consult people with local experience and influence.

Consequently, to build a joint venture is a promising solution. I will take a further look at

how the sample companies deal with the challenge.

Results. Products of Pfizer, AstraZeneca, and Roche face less domestic competition due to their novel characteristics. In GSK, Novartis, and Wyeth, the competition with Chinese medicine exists. As the only OTC drug in Novartis, Voliant has to compete with Chinese plaster as a muscle antalgic. To use a plaster to kill pain is a traditional treatment similar to acupuncture in Chinese medicine. Fenbid of GSK with the same indication has the problem. Hence, how to introduce a new concept to use a painkiller is the challenge for Novartis and GSK. Wyeth’s new product Robitussin was put into market in 2003, and entered reimbursement list in 2004. It has not become the profit point due to the small market share. The powerful competitor is a Chinese medicine produced by Nian Ci’an in Guangzhou province, by which more than half of the market share is occupied.

To compete with Traditional Chinese medicine, what these foreign pharmaceuticals have done is similar: they hire experts and employ advertisements to propagandize the drug to the public, and organize lectures and conference for the doctors with the aim of getting to know their products. Such activities are considered to be much easier with the help from local partners, and the extend to which Chinese consumers follow the advertisement or the advise from experts and doctors is high. In terms of this issue, similar answers are gained in GSK, Novartis, and Wyeth. Interviewee from Wyeth Nutrition says:

“With the efforts from the foreign pharmaceuticals, Chinese consumer preference is easily to be changed because their drug using habit is very advertisement and consultant oriented. These activities increase the sales of OTC drugs dramatically for our company. ”

Analysis. 3 out of 6 companies are discussed under this proposition. The general

conclusion from these 3 companies is that in China, consumer preference is easy to be changed. Therefore, although GSK, Novartis, and Wyeth have got local competitors, the profits are not influenced much because of this. According to the proposition, the entry mode should reveal a trend towards wholly owned subsidiary when the consumer preference is easy to be changed. Therefore, the proposition is tested in GSK and Wyeth.

Moreover, since consumer preference is not a hard issue so that interviewees in these 3 companies do not think that it is a key factor to influence entry mode.

Social network

Proposition 5: Other things being equal, foreign pharmaceutical companies prefer joint venture to wholly owned subsidiary if the companies are lack of social network.

Current status. Social network helps to build good public image and sustain solid relationship with governmental institutions. Nearly every department of the company has something to do with the social network. For example, if officers in SDA are an acquaintance of the person who is in charge of new drug registration, the process will be easier and quicker. Bureaucracy does exist prevalently in China, but it is also owing to the higher trust level among people who have some kind of relationships. Therefore, foreign pharmaceuticals needed some relations and background knowledge that has been gained from their local partners. As pharmaceutical giants with good reputation and standard operation procedure of their own, companies in the sample generally declare the fact that to form a joint venture with Chinese partner is helpful in dealing with relationships and exploit the market. It is like to find a tour guide to do sightseeing.

However, even with local partners, in every sample company, the philosophy of doing

business is quite different from state owned counterparts. For instance, state owned