Factor conditions in the French pharmaceutical industry

Regular readers of Alpha.Sources have probably noticed that I have been indulging on a lot of copy/pasting in my posts recently. This obviously does not make the topics any less interesting but still it merits an explanation. Basically it is because I am preoccupied with writing a project about the French pharmaceutical industry, and if you want to know what I have have on my mind at the moment I encourage you to read on through this rather lenghty post ...

To give a quick overview of the project it is basically an industrial analysis of the French pharmaceutical industry build upon Michael Porter's diamond (i.e. theory of national competitive advantage.)

The gist of Porter's theoretical argument is the following ...

“The basic unit of analysis for understanding national advantage is the industry. Nations succeed not in isolated industries, however, but in clusters or in industries connected through either horizontal or vertical relationships. A nation’s economy contains a mix of clusters, whose makeup and sources of competitive advantage (or disadvantage) reflect the state of the economy’s development.”

this is also important ...

"Basically, firms gain competitive advantage where the home base acts as a catalyst of competition, innovation, change, and accumulation of crucial input resources. This home base/nation is then coined as the four determinants of national advantage (in a given industry; i.e. the diamond)."

The following is a part of the analysis I have been working on which pertains to factor conditions as a determinant in the French pharmaceutical industry; (only the intro and summary are included but it should give you an overview)

Traditional disclaimer :) - Typos, mis-spellings and wonky phrases are obviously an integral part of the paste below so please point them out if you see them.

5.2 Factor conditions
In the following we engage in the analysis of factor conditions as one of the determinants of national competitive advantage in Porter's diamond. In our analysis of factor conditions we will focus on three out of the five factor categories cited by Porter, namely those of human resources, knowledge resources, and capital resources. In Porter's framework of factor conditions, a nation gains the ability to acquire and sustain competitive advantage in a particular industry if it posses factors salient to the competition and advantage in that specific industry.

One of the overall critical success factors in the pharmaceutical industry closely related to the analysis of factor conditions is the amount spend on research and development (R&D) and crucially the efficiency of the R&D process (R&D productivity). In Porter's context this crucially suggests that only factors which support and nurture the effectiveness of the R&D process can yield a sustainable national advantage. In the context of our analysis the main objective thus becomes to identity the salient factors which underpin the process and efficiency of R&D and to investigate the presence of these factors in France and how the single market (EU) relates to this.

5.2.1 Input variables and value added

In order to construct a coherent argument on factor conditions which relates to the definition of human, knowledge and capital resources we introduce value added as a function of input variables as a measure of competitiveness in the pharmaceutical industry derived from the work of three Italian scholars. In Porter's context input variables to production are coined as either human (labour), knowledge or capital inputs. The crucial distinction in this context is the distinction between labour inputs to production (human resources) on the one hand and non-labour input (capital resources and knowledge resources) on the other. In a context of the pharmaceutical industry where the amount and efficiency of R&D is crucial it consequently means that non-labour inputs are relatively more valuable than labour inputs when it comes to the creation and sustainability of competitive advantage. Applying the concept of value added it means that labour inputs to production in the pharmaceutical industry yield less value added than non-labour inputs. Crucially, this furthermore allows us to coin important distinction between generalized/basic factors and advanced/specialized factors. Hence, labour inputs (human resources) represent the former whereas non-labour inputs (capital and knowledge resources) represent the latter.

Initially, the main argument in Gambardella et al's study gives a strong hint to our argument in a French context as it is concluded that the activities conducted in Europe relative to USA and Japan yields less value added as a function of a higher ratio of labour inputs to production. The objective for us though is obviously to scrutinize the input variables in a French context.


5.2.4 Summary - Low Value added activities in France

A strong manufacturing position in a global industry is obviously not a negative thing and as such it shows that France exhibits strong productivity in the context of the pharmaceutical industry. In our theoretical framework it could thus with some justification be held that the analysis of factor conditions grants France basis for a competitive national advantage in the production of pharmaceuticals. However, by identifying R&D as a crucial criterion for success epitomized through Gambardella et al.'s point stating that labour inputs yields less value added that non labour inputs we are able make some interesting conclusions in a French context.

Consequently we can make two important conclusions: Firstly, we see that the activities conducted in the French pharmaceutical industry must be considered as relatively low value added because of the French industry's high amount of labour input. That furthermore translates into the fact that France's factor creating mechanism is relatively weak. This is because it is not very good at creating the factors which result in high value added production in the pharmaceutical industry and thus are important to create and sustain a national competitive advantage; namely non-labour inputs coined as capital and knowledge resources. Secondly, we observe that France's competitive national advantage in the pharmaceutical industry is less sustainable because it is vested in basic/generalized factors.

Another important point in analysis of factor conditions which deserves notable attention is the importance of exogenous variables such as government and EU/the Single Market. Thus, we demonstrated how the French government and EU/the Single Market had a decisive negative impact on France's ability to create the salient factors needed to create a sustainable advantage in the pharmaceutical industry. In the context of the French government our point was derived from the fact that the French government traditionally represents a strong actor in the country's research intensive industries but that this was not the case in the pharmaceutical industry. We furthermore pointed to the lack of synergy between the public and private sector which was shown to have a negative impact on France's ability to create knowledge resources in a pharmaceutical industry context.

Including the EU/Single Market we also showed how France's factor creating mechanism in knowledge and capital resources for R&D was negatively affected by a general environment of meager public investment in research, poor communication between academia and industry, and bureaucratic delays.

Conclusively, the points above incite us to claim that factor conditions as a determinant in Porter's diamond does perhaps provide the grounds for a competitive national advantage in France for the manufacturing of pharmaceuticals. But more importantly, this advantage overall is unsustainable in a broad context of the pharmaceutical industry because it is vested in basic/generalized factors yielding low value added.

References (for the whole paper!)

Begg, David; Fischer Stanley and Dornbusch Rudiger 2003 – Economics 7th edition; McGraw-Hill Education

Dunning, John 1993 – Management international review, 1993. - Vol. 33, special issue, no. 2, 1993; “Internationalizing Porter’s diamond”

Mason, Antoine November 2002 –. Ministere de l´Économie, des finances et de l’Industrie – Renforcer l’attractivité de la France pour l’industrie pharmaceutique innovante.

SESSI-DiGTIP 2003 ; Ministère d l’Economie des finances et de l’industri – L’industrie pharmaceutique – sur les chemins difficiles de l’internationalisation.

Mossialos, Elias and Oliver, Adam International Journal of Health Planning and Management 2005 issue; 20 pp. 291-306. Guest Editorial –– An overview of pharmaceutical policy in four countries: France, Germany, the Netherlands and the United Kingdom.

EFPIA [1] 1999 - THE SINGLE MARKET IN PHARMACEUTICALS http://www.efpia.org/2_indust/topic_1.pdf (retrieved 15.3.2006)

EFPIA 2005 – The pharmaceutical industry in figures http://www.efpia.org/6_publ/infigures2005.pdf (retrieved 15.3.2006)

Taggart, James 1993 – The world pharmaceutical industry; Routledge, London and New York

Economist, the December 4th 2003 (print edition) – Big trouble for Big Pharma.

Economist, the May 9th 2002 (print edition) – Just a placebo.

Gasmann Oliver, Reepmeyer Gerrit and Von Zedtwitz Maximillian 2004 – Leading Pharmaceutical Innovation; Springer Verlag Berlin .

Gambardella Alfonson, Orsenigo Luigi, and Pamolli Fabio 2002 – Global competitveness in pharmaceuticals, a European perspective. http://pharmacos.eudra.org/F2/pharmacos/docs/Doc2000/nov/comprep_nov2000.pdf (retrieved 16.3.06)

Porter, Michael E 1990 – Competitive Advantage of Nations. Ch. 3: Determinants in National Advantage pp. 69-130.

Puig-Lunoy, Jaume 2005 – The Public Financing of Pharmaceuticals; Edward Edgar Publishing Limited – Cheltenham UK.

[1] The European Federation of Pharmaceutical Industries and Associations (EFPIA) is the

representative voice of the pharmaceutical industry in Europe.