An exploratory investigation of international pharmaceutical firms' FDI decision into China: a comparison between eastern-firms and western-firms

Journal of the Academy of Business and Economics, Jan, 2003 by Fuming Jiang

ABSTRACT

This paper investigated the determinants of international pharmaceutical firms' foreign direct investment (FDI) into the Chinese pharmaceutical manufacturing industry during the period from 1980 to 1998. The analysis of 43 cases showed that international pharmaceutical firms' FDI into China were predominantly driven by China's specific location factors. China's market size with its great potential played the most important role. China's rapid economic development & growth and its open-door policy were other two important determinants. Relative stable political conditions and incentive policies provided by China were also considered as important factors. The impact of relatively stable political conditions in China on western pharmaceutical firms' FDI into China was significantly greater that that on eastern firms'. Incentive policies provided by China received more attention from eastern firms.

1. INTRODUCTION

China has attracted substantial FDI since the passage of the Chinese-Foreign equity joint venture law by the National People's Congress of China in 1979. FDI grew from a modest amount of a few hundred million dollars annually in the late 1970s and early 1980s to almost US$ 3.5 billion annually in the late 1980s. Beginning with an over 25% growth in 1991, China has since attracted greatly increased amounts of FDI. An approximately 152% increase for 1992 based on the previous year, an almost 150% increase from 1992 o 1993, a further 20% growth in 1994, over 10% growth for both 1995 and 1996, and an over 8% increase to reach US$45.257 billion in 1997. China recorded FDI inflow worth US$ 45.463 billion for 1998 (SSBPRC, 1999). The country had been second only to USA as the major recipient of FDI from 1993 to 1997, and ranked in the third position in 1998 in the world (UN, 1996-1999). During the period from 1992 to 1998, China had hosted almost 10% of total FDI inflow in the world, and absorbed over 28% of the total FDI inflow to developing countries and over 46% of total FDI inflow to Asian countries or regions. South East Asian countries or regions attracted about US$480 billion FDI flows from 1992 to 1998, and about 50% of this went to China (UN, 1996-1999). China had approved and signed 324,134 FDI agreements and contracts with foreign investors from 1979 to 1998, and almost 20,000 projects for 1998 (SSBPRC 1999). Large proportion of the FDI inflow received by China came from Hong Kong, Taiwan, Singapore, South Korea and other developing countries/regions. During the period of 1978~1998, over 70% of total FDI inflows to China were from Asian/developing countries/regions including Hong Kong (53.89% of the total ranked as 1st) Taiwan (4th), Singapore (5th), South Korea (6th), and Thailand (11th). With the exception of Japan (8.03%, ranked as 2nd) and USA (7.91%, ranked as 3rd), other industrialized countries played a minor role (refer to TABLE 1).

The popularity of FDI activities in China also applies to the pharmaceutical industry. A significant number of American, European, Japanese and other Asian pharmaceutical groups had been actively pursuing and evaluating avenues of access to the Chinese pharmaceutical manufacturing industry and established over 1,500 pharmaceutical companies during the period from 1980 to 1998. Foreign invested pharmaceutical companies were distributed in almost every part of China (CCPIE, 1995). This paper was to explore why foreign pharmaceutical firms' made their FDI in China, and further to compare FDI decision patterns between eastern and western pharmaceutical firms. Most of current FDI theories revealed from the research studies that were conducted mainly based on western firms' FDI activities. A comparison of the FDI decision patterns between eastern and western pharmaceutical firms would be expedient and meaningful, and contribute to a better understanding of FDI theories in general.

2. FDI LITERATURE

The theories of foreign direct investment have traditionally emphasised market imperfection (Hymer, 1960; Kindleberger, 1969), location specific advantage (Franko, 1971; Vernon, 1977), internalization theory (Buckley and Casson, 1976), and transaction cost theory (Williamson, 1975 and 1979; Buckley and Casson, 1976; Caves, 1982; Anderson and Gatignon, 1986). Dunning's (1988) "eclectic paradigm" denoted that a firm's FDI decision is influenced by three types of factors: ownership-specific factors of a firm, location-specific factors of a market and internalization advantages of integrating transactions within the firm. Taggart (1993) suggested that the three main divisions of FDI theory (three-division theory), via approaches based on domestic market imperfections, firm specific advantages, and location specific advantages were generally more appropriate reasons for explaining why multinational pharmaceutical firms invest abroad. Location specific advantages including market size, stage of economic development, host country's incentive policies, labour cost considerations, trade barriers, openness of the economy, etc. have recently attracted considerable research attention in explaining why FDI occurs in China. Zhang and Yuk (1998) asserted that FDI pattern in China is most likely to be determined by the location specific advantages.