Why Should Emerging Countries Invest in US Pharma/Biotech?
The United States has traditionally dominated the market for commercial applications of pharma/biotech research and has the largest number of start-up ventures in the biotechnology industry. Because critical technical knowledge is distributed unequally over international countries or regions, it is likely that foreign pharma/biotech firms target US firms for knowledge sourcing strategies and technological competence. The industry itself is expensive and has multiple barriers to entry due to heavy reliance on scientific research and complex product development and approval cycles (Shan, 1997).
Because most pharma/biotech firms typically have no products in the marketplace, they are valued by the number of potentially viable products in their R&D pipeline and/or patented innovations. Competitive strategy for all firms involves generation of new knowledge and the race to patent those innovations. Each patent grants successful companies limited monopolistic advantage over a specific market share for a set amount of time allowing them to produce enough revenue to cover R&D costs and have a substantial profit margin.
For a client from an emerging economy interested in investing in US pharma/biotech:
Foreign direct investment in a high-technology industry is generally motivated by sourcing of the country-specific technological advantages of the firm (Peng, 2000). In knowledge-intensive industries like biotech, value is mainly based upon future growth opportunities rather than existing cash flows. Therefore, foreign direct investment in the form of equity participation would be the most effective vehicle for capturing country-specific, firm-embodied, technological advantages.
What sets the US apart from other countries and why it maintains leadership in the biopharmaceutical industry is its ability to capture and ignite stellar science, leading to a rapid rate of innovation. The resulting product/technology can then be transferred to the market for commercial purposes for a complete end-to-end solution. High levels of patent activity and high demand of innovative products makes the biotech sector particularly attractive to foreign investors. FDI is a long term commitment and the US seems to have the best risk-adjusted ROI in this industry.
Peng, M.W./Wang, D.Y., Innovation Capability and Foreign Direct Investment: Toward a Learning Option Perspective, Management International Review, 40, Special Issue 2000, pp. 79-93.
Shan, W. & Song, J. J Int Bus Stud (1997) 28: 267. doi:10.1057/palgrave.jibs.8490101