Fdi in R&D in China

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Nowadays, one of the major issues for companies is innovation. Indeed, the ability for a company to have a strong commercial strength depends for one part on the creation of new products. These new products, very often, come from innovation and research & development. For pharmaceutical companies, innovation and the capacity to propose new drugs on the market is a matter of survival. As a matter of fact, most of the turnover of pharmaceutical firms comes from the sales of drugs with limited patent duration. It means that as soon as their patents expire, pharmaceutical firms will no longer have the exclusivity on these drugs and will have to compete with generic drugs. These drugs are cheaper, thus companies face a drop in their turnover. To avoid this risk, pharmaceutical firms, have to invest strongly in research & development. Sanofi-Aventis is the first French pharmaceutical group and is ranked at the sixth position, behind Merk. Sanofi make a turnover of 30,3 billion Euros in 2010 and spend 4,56 billion Euros in R&D. The goal is to find new molecules with medicine applications, transform them into a new drug to sell and so offset the losses of drugs which are no longer protected by a patent. In this context of heavy investment in R&D, pharmaceutical firms don’t restrict themselves in their home country and R&D center entirely hold by one firm. Instead, pharmaceutical firms offshore their R&D and multiply partnerships with universities and independent institutes. One country in particular seems to be more and more attractive to receive FDI in R&D: China. Since the beginning of its liberalization at the early 80’s by Deng Xiaoping, China is the biggest developing country hosting FDI and has received more than 105,735 billion dollars in 2010 . Sanofi-Aventis has been the first pharmaceutical firm to establish in China in 1982 at Beijing. Now, the firm registers 25.1% of its turnover in developing countries with an increase of 28.8% in China where it invests massively in R&D. After seeing why China is an attractive country for R&D investments especially for Sanofi-Aventis, we will present the risks linked to that kind of investments in China.

The decision of investing in research and development in a foreign country is driven by 3 major motivations. The strategy of doing R&D in another country can be market oriented, technology oriented or human resources oriented. To begin with, investing in R&D is a way to penetrate a domestic market in high expansion, as it is the case in China. It helps understand the specifics needs of a market and tailor products to these requirements. The second motivation is about technology. Companies with this strategy invest in a country to have access to very high tech equipments. In other words, when investment in R&D is driven by technology, the R&D is more oriented in pure research called fundamental research than in development. The third motivation is human resource oriented. Companies are looking for a very high qualified work force to lead the research. These 3 major motivations are applicable for every country but when we focus on China, « statistical analysis confirms that the major motivation of foreign R&D in China is “market driven” instead of “technological driven” or “human resource driven”. However, there is a great variation of foreign R&D strategy across regions. Market driven R&D is found mainly in Guangdong, which is called a world IT factory, and does not have strong universities or PRIs. In contrast, R&D strategy in Beijing is oriented toward technology driven approach, because we can find a cluster of scientific institutions there. Shanghai, with both a large industrial base as well as strong science sector, is in-between. » Knowing this, it is interesting to apply this concept to Sanofi-Aventis. The firm’s establishment in China is mainly made in partnership with Chinese institutes in Beijing and Shanghai. Sanofi opened an R&D center in Shanghai in...
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