The pharmaceutical sector, more than most, is highly dependent upon FDI. The reason for this is the high capital and technology-intensive nature of the sector. The barriers to entry are high and the industry is control by a handful of global giants. Few countries attempt to nurture a homegrown industry and instead seek to attract investment in the sector from established companies. Such investment could take many different forms, most notably in setting up a lab to conduct R&D or establishing a manufacturing facility.
That countries seek to attract FDI in the pharmaceutical sector is unsurprising. Foreign investment has long been viewed as necessary to promote economic growth and development. In addition to the transfer of capital, FDI is broadly associating with other positive externalities. Such as the diffusion of knowledge and the importation of advanced technology (so-called “technology transfer”), know-how, and technological and managerial skills. Recipient countries also benefit from FDI in countless other ways. Including increased levels of employment and tax revenue, expansion of local production and exports, and enhanced local innovation capacity.
Benefits of FDI
With the perceived benefits of FDI so great, it is also unsurprising that countries compete to attract foreign investment. This aspect of FDI – that is, why firms invest in one country over another – has long attracted the attention of academics and policy-makers. This article relies on available studies and evidence to examine the relevance of a range of location-specific factors identified in the economic literature as key FDI determinants. In order to better understand why Hong Kong has failed and Singapore succeeded in attracting FDI in the pharmaceutical industry.
More specifically, the article focuses on the relevance of various location-specific factors in order to explore the policy implications of robust FDI in the pharmaceutical sector in Singapore against the absolute absence of such FDI in Hong Kong despite seemingly similar conditions. The fact that Hong Kong has not succeeded in attracting FDI in the pharmaceutical sector is not in doubt. The pharmaceutical industry in Hong Kong is clearly underdeveloped, with minimal local manufacturing and negligible R&D. The domestic industry consists of a small number of companies producing primarily generic pharmaceuticals predominantly for the local market.
Imports make up the bulk of the overall pharmaceutical market, which in total accounts for a miniscule 0.5 percent of GDP in 2012. Moreover, local pharmaceutical manufacturing is not forecasted to grow in the near future. Looking beyond manufacturing, Hong Kong does not appear to host any significant R&D activities. In contrast, the biopharmaceutical sector is thriving in Singapore. With companies specializing in the pharmaceutical, biotechnology, and medical technology research and manufacturing. Biomedical manufacturing in Singapore has almost quadrupled in the period between 2000-2010. From S$6 billion to S$23.3 billion, and now accounts for 5 percent of GDP.
Regional R&D hub
Singapore has also become a regional R&D hub, hosting high-level facilities of several MNCs and employing over 7,000 workers. The difference between Hong Kong and Singapore in attracting MNCs to establish and maintain pharmaceutical production could not be starker. In Hong Kong, the presence of pharmaceutical MNCs is limited to marketing and sales activities, with no MNC having established any local production or R&D subsidiaries. In sharp contrast, virtually all of the leading multinational pharmaceutical companies have established manufacturing operations in Singapore. With production ranging from generics to the best-selling patented products.
This activity has led industry analysts to refer to Singapore as the “[pharmaceutical] trading base for the South East Asian region”. Remarkably, pharmaceuticals are now the leading sector for manufacturing FDI in Singapore, attracting S$44.5 billion in 2011. It is thus not an exaggeration to say that the pharmaceutical manufacturing sector has become an integral part of Singapore’s economy.
In terms of R&D, Singapore has established itself as one of the leading locations for pharmaceuticals in the world. The difference between pharmaceutical FDI between Singapore and Hong Kong is perhaps foreseeable given the make-up of inward FDI in the two jurisdictions. While both Hong Kong and Singapore are among the most open to and largest global recipients of FDI. The manufacturing sector is the second highest category of inward FDI in Singapore. Counting for over 20 percent of the total in 2011. Whereas manufacturing FDI in Hong Kong accounted for less than one percent of total FDI in 2011.
Focus on different economy
Hong Kong is clearly focused on a service-oriented economy whereas Singapore has developed a more diversified economy. But it would be a mistake to assume that Hong Kong has completely abandoned other sectors. On the contrary, manufacturing still accounts for 3 percent of total employment and Hong Kong often promotes itself as an attractive destination for conducting R&D. In fact, InvestHK (the government agency responsible for attracting FDI) even promotes the “biomedical” sector as one of its seventeen featured investment sectors, calling Hong Kong the “ideal location … [and] an attractive market for biotech and pharmaceutical companies”. Given the government’s apparent interest in the pharmaceutical industry. The lack of FDI and activity is curious and warrants further inquiry.
Two questions thus arise with regard to the disparity between the large-scale pharmaceutical FDI in Singapore and its absence in Hong Kong. Firstly, what is or are the cause(s) of Hong Kong’s lack of pharmaceutical FDI? Secondly, are local stakeholders in Singapore better-off due to the presence of FDI in the pharmaceutical sector; in other words, does the absence of pharmaceutical FDI in Hong Kong deprive its populace of the benefits accrued by such FDI in Singapore?
The first question deals with the identification and evaluation of FDI determinants specific in the context of each jurisdiction. The second question ultimately requires the evaluation of the net benefits of FDI in Singapore. And identifying whether such benefits are available to Hong Kong stakeholders, albeit achieved by alternative means. While this article focuses on the first question, some of its findings might contribute to further research on the implications of FDI for industry and healthcare sectors.
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