International Trade and Finance - Pharmaceutical Industry in Germany

Table of Contents

1. Introduction

2. Research and Development & Knowledge Creation

3. Economic Theories

4. Germany and the pharmaceutical industry

5. Conclusion

6. Bibliography

Appendix
Gross domestic expenditure on R&D of OECD countries
Gross domestic expenditure on R&D in Germany
Expenditure on education, science, research and development by the Federal Ministry of Education and Research
R&D Intensity in Germany in 2002
Pharmaceutical Industry in Germany – Facts and Figures 2004

1. Introduction

According to Krugman (1992, p.17), “there was never a time when the study of international economics was as important as it is today”. Through international trade in goods and services and the international flows of money, the extent of markets is widened in order to offer the consumer a larger variety of products. Along with Bolisani and Scarso (1996), “global competition urges firms not only to develop a strong commercial presence in the world market, but also to assume an international configuration with regard to operations.”

Van Marrewijk (2002) argues that it increases the “welfare of a nation through the love-of-variety effect for final goods or raises production through increased specialization leading to positive production externalities”. This, of course, raises the competition of different companies in different nations towards quality improvements and innovation which results in increasing efforts in Research and Development (R&D). Grossman and Helpman (1991) demonstrated in their approach that it is more complex to improve quality than increase product variety, even though they have similar profitable results. Nevertheless, it can be assumed that by innovation through more engagement in R&D the operating profit will be increased.

The WTO is one of today’s organisation dealing with international trade issues and basically assuring and emphasising free global trade, but during its formation also other regional trade agreements between countries occurred (regionalism). Soon the fear of a swift from multilateralism towards regionalism and protectionism appeared which was constituted by Krugman’s framework of intra-industry trade, which takes place “in order to take advantage of important economies of scale in production”. Therefore, intra-industry trade became of particular importance with the removal of tariffs and trade barriers. (Salvatore, 2004, p.171)

However, it can be said that trade between nations “is a form of exchange which contributes to increased wealth, rising living standards and the sustained economic development of trading nations”. (Lawler and Seddighi, 2001)

This paper will firstly analyse the importance of R&D, its global dimension and its future trends. Furthermore, the emphasis by nations put on investment in knowledge will be explained. The second part then outlines the main economic theories concerning innovation and knowledge creation. Finally, Germany and its pharmaceutical industry will be taken as an example to illustrate the dimensions of investment in R&D and its outcomes.

2. Research and Development & Knowledge Creation

According to the United Nations (2006), Research and Development can be defined as “any creative systematic activity undertaken in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this knowledge to devise new applications.” This also includes the research applied in such fields as “agriculture, medicine, industrial chemistry, and experimental development work leading to new devices, products or processes.”

Today’s business environment indicates a high level of integration with rapid technological change which creates a new situation for competing companies. According to ‘World-wide R&D’ (2006), the global business climate has continued to improve in overall sales growth, profitability and R&D levels, measured among the 1,000 largest companies by R&D investment. Tubbs (2005) argues that R&D becomes more and more important for generating new products providing a competitive advantage because when a firm invests relatively less in R&D compared to its competitors, it will soon lose the competitive edge and has to increase lower value added products. Therefore, a company’s competitiveness is highly reliant on its “capacity to innovate and create new value”. (Kastelli, 2006) Knowledge creation, in this context, can be defined as the capability of a firm, to create new knowledge, circulate it throughout company and exemplify it in its product, services and systems (Nonaka and Takeushi, 1995).

Besides using their own knowledge competencies, firms also network with their environment in order to increase skills with complementary competencies of others. (Kastelli, 2006)

Figure1 illustrates the necessity of R&D investment for R&D-intensive companies and the size of these investments for the three largest R&D intensive sectors.

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Figure1. R&D compared to key company expenses for 3 R&D-intensive sectors

Source: Tubbs, 2005

Global R&D

Over the past decade, the expenditure on R&D has been rising constantly to US $ 829.9 billion in 2002 which indicates that 1.7 % of the worlds GDP is spend on R&D. (Unesco Science Report, 2005)

The OECD Factbook (2006) states, that the “expenditure on Research and Development (R&D) is a key indicator of government and private sector efforts to obtain competitive advantage in science and technology.” The gross domestic expenditure on research and development, also referred to as GERD, then indicates the “total expenditure on R&D performed on the national territory” It is used for an international comparison and includes all local firms and laboratories and excludes financial expenditure which is invested abroad. (Federal Ministry of Education and Research, 2005)

Gross domestic expenditure on R&D

As a percentage (2004, latest available year)

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Figure 2. Gross Domestic Expenditure on R&D

Source: OECD Factbook, 2006

It can be seen in Figure 2, that R&D in 2003 summed up to 2.3 % of GDP of the total OECD countries. According to the OECD Factbook (2006), it should be taken into consideration that several countries like Japan, the Netherlands, Norway and the US have advanced their R&D activities in the service sector or in a higher education.

R&D trends

It can be argued that gross domestic expenditure on R&D increased in Japan (from 2.96 % in 2000 to 3.15 % in 2003) and, even though a little lesser, in the European Union (from 1.87 % to 1.91 % in 2003), whereas it decreased in the United States (from 2.74% in 2000 to 2.68 % in 2004). With Iceland (2.97 % in 2003) bordering the 3 % mark, Japan (3.15 %), Finland (3.48 %) and Sweden (3.98 %) are the only OECD countries in which the R&D intensity surpassed the 3 % mark in 2003. Compared over the period from 1981 till 2003, Portugal (0.30 % to 0.78 %), Iceland (0.64 % to 2.97 %) and Turkey (0.32 % in 1990 to 0.66 % in 2003) have been growing the fastest in terms of their R&D expenditure. (OECD Factbook, 2006, see Appendix 1)

With US $ 307.2 billion, North America has spent 37.0 % in 2002 of the world gross expenditure on R&D and is therefore the main investor in knowledge creation, even though it has a little decreased since 1990 (38.2 %).

(UIS Bulletin on Science and Technology Statistics, 2004 )

As stated in Figure 3, it is crucial to see that Asia, with 31.5 %, took over Europe (27.3 %) in its world shares of GERD. According to the above stated facts, the US gross domestic expenditure on R&D was decreasing between 2000 and 2004, whereas Japans GERD was increasing tremendously by almost 0.2 % within the last 4 years. This then links us to the question whether the US, Japan and some northern European countries can keep their dominance in knowledge creation or if the wealth gained from R&D activities will be shared among a larger number of countries and “a more balanced situation is emerging”. (Unesco Science Report, 2005)

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Figure 3. World Shares of GERD in 2002

Source: Unesco Science Report, 2005

Investment in Knowledge

“Investment in knowledge is defined and calculated as the sum of expenditure on R&D, on total higher education (public and private) and on software.” (OECD Factbook, 2006)

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