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Research Activities

Research Projects

FY 2007/2008 Research Topic: 6-02
The Pharmaceutical industry in China: Impact of Medical System Reform on Corporate Strategy and Innovation Capability

Outline

The pharmaceutical industry in China is often criticized in the following terms: “It offers mostly generic drugs, and almost no innovated/patented drugs.” “Most are old, and very few are new.” “Drug prices are so high that the firms enjoy a monopoly.”

The pharmaceutical industry operates under strong regulations or institutions of society. (1) Looking at demand, medical doctors act as agent for patients in purchasing drugs. The other direct buyer of drugs is the medical insurance system, not patients. Thus, if the incentive systems towards doctors and patients are not well designed, the medical insurance system may go bankrupt. (2) For supply, though drugs are a special type of product that are important for the health of nations, private firms supply them in the most of world.

This may be because drugs have to be supplied in wide varieties and small quantities, and the product cycle is short, making it difficult for monopoly state-owned enterprises to meet the demand. However, there are many SOEs operating in China. (3) Government intervention is a critical factor in the corporate strategy on prices. Publicly set drug prices have a critical effect on pharmaceutical firms’ choice of production and innovation of drugs. In 2006, the Chinese government announced a large reduction of drug prices. This will definitely affect corporate behavior. Furthermore, quality and safety control are requirements. In addition to these general features, (4) the patent system and (5) industrial policy called “protection for new drugs” seem to have substantially affected corporate behavior, and particularly decisions on innovation among China’s pharmaceutical industry.

In 2006, a substantial reform of the medical system was announced. Currently, basic studies are being carried out toward reforms. This may significantly affect the environment in the Chinese pharmaceutical industry. The project aims to investigate how these institutional settings affect corporate strategy, and to provide a baseline study for medical system reform to understand its impact on suppliers.

Period

September 2006 - August 2007

Organizer

WATANABE Mariko

Members of the Research Project

WATANABE Mariko
Xiaohong CHEN (Director, Institute of Enterprise Research, Development Research Centre)
Jinyan CAO (Vice Director, Intellectual Property Development Research Center, State Intellectual Property Office)
Zhengjun ZHANG (Development Research Centre)
Anbo XIANG (Development Research Centre)
Luwen SHI (Professor, Health Science Center)

Publications