Control Variables

total sales for a specific product market operated by focal firm i total sales for market segment m

total sales for the specific active ingredient j in market segment m total sales for active ingredient j

market segment or institutional venue

This firm-specific analysis falls in line with our argument that firms in industries which have no way of coordinating strategic interaction across markets will also not view competition in dyadic relational terms, but rather judge competitors in the aggregate when making entry decisions.

Relative Institutional Match for Hypothesis 4, likewise, is measured analogously.

5.3 Control Variables

Other variables are included to control for the effects of factors that have a well-reported influence on entry in the generic drug industry. In relation to firm characteristics, we control for Firm age (number of years since first established) and Firm size. Apart from firm-specific factors, entry incentives may also be affected by target market characteristics. Market size (total sales of branded ingredient) has been found to have a sizeable effect on entry decisions in the generic pharmaceutical industry, thus we include it in our research. As drugs which treat chronic illnesses have also been known to attract entry (Scott Morton, 1999), Chronic was included in the initial analysis, but due to problems of multicollinearity, this variable was omitted in the analysis which led to the following results.

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26 6. RESULTS

Table 1 reports summary statistics and correlations for our analysis of entry in Taiwan’s generic pharmaceutical industry. With the exception of Institutional Match, all variables are highly correlated. Out of the 21 firms sampled, 17 experience entry. Our analysis of entry decisions focused on three active ingredients which recently went off-patent during our sample period: acarbose, repaglinide, and simvastatin. For acarbose, there were eight entrants; for repaglinide, five; and for simvastatin, six. Only China Chemical & Pharmaceutical Group (CCPG) launches all three active ingredients, although at different time intervals.

Table 2 presents the regression results showing the effects of the antecedents of entry.

Each model is presented with the coefficient estimates and standard errors (in parentheses) of the parameters, and fit statistics are given below. The values for the Pseudo-R-square measure do not seem overwhelming as a proportion of explained variance, but increase with each model.

The chi-square statistic also shows increase of fitness with the addition of variables.

Model 1 includes only the control variables and shows firm size to be relevant across all models, except for Model 4 and Model 5. This outcome would lead us to believe that size plays a less important role when external considerations of competitors come into play, as opposed to when the internal resource considerations take precedence. Market size and firm age have negligible influence on entry decisions, in contrast to previous research. Models 2 to 3 predict the effects of internal resource considerations on entry, while Models 4 to 5 test the effects of external competitive consideration. Product Match from the first hypothesis shows a positive and significant effect across all models, supporting H1 (p<0.01). Model 3 adds Institutional Match, which, though not significant, shows a surprisingly negative effect. This outcome needs to be further investigated. It should be noted that with the inclusion of Institutional Match, the

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coefficient for Product Match increases appreciably. Because high levels of multicollinearity can lead to unstable and unreliable coefficients, we investigate the possibility of this

phenomenon by employing variance inflation factors (VIF). VIF reflect the impact of multicollinearity on each independent variable in the model. In our analysis, VIFs do not indicate the presence of multicollinearity in a way that could render the coefficients unreliable, with the mean VIF showing a value of 2.93, and with Institutional Match having the highest value of 7.03. We thus reject H2.

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H3 posited that the more similar the ingredients in the resource profile of a focal firm as compared with its closest competitors, the more likely the focal firm will commit to entry.

Relative Product Match shows very positive albeit no significant effects, preventing us from being able to confirm support for H3. Nevertheless, the inclusion of Relative Product Match in the model has the effect of substantially reducing the coefficient for Product Match in Model 4.

This would lead the researcher to infer that external competitor considerations might not be as helpful in explaining entry decisions as much as organizational experience. Likewise, Relative Institutional Match shows positive albeit not significant effects and therefore does not support H4. Thus, Chen et al.’s (2007) hypotheses on competitive relationships were not found to be replicable in our context.

7. DISCUSSION

The aforementioned findings would appear to lend empirical support for a marked emphasis on the internal considerations of the generic drug firm when making entry decisions, albeit a very tentative support. The effect of a firm’s organizational experience was highly supported, thus confirming previous research on the generic drug industry (Scott Morton, 1999, 2000; Nerkar and Roberts, 2004; Iizuka, 2009) as well as recent capabilities-based literature on market entry (Lieberman and Helfat, 2002; Thompson, 2007). An important element of the RBV is the assumption that those resources forming the basis of an existing firm’s competitive

advantage are rarely easy to identify from the outside (the causal ambiguity problem) and, if identified, are difficult to replicate, even for the firm’s own managers (Barney, 1991).

Accordingly, Penrose’s resources approach puts emphasis on strategic experimentation in diversification strategy through adaptive and creative responses. Strategic experimentation is a

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component of the competitive process, and it is often the key to maintaining the existing

capabilities and protection of a current advantage (Kor and Mahoney, 2004). Thus, capabilities-building, although assumed to be an automatic process in the RBV, still denotes reliability in entry decisions, especially when put in contrast to AMC’s competitive relationships, for which the intensity may often ebb and flow.

This assumption might be highly relevant in explaining why Hypotheses 3 and 4 were not supported, as the unpredictability of competitor’s actions is heightened in a context of

simultaneous entry games, which characterize the generic pharmaceutical industry. Even if generic drug firms have the ability to enter a market in response to competitive pressure due to risk to overall profits, accumulating and developing internal efficiency takes precedence in dynamic context of the generic drug industry. A working paper by Gallant et al. (2011) extends Scott Morton’s work with the finding that knowledge spillovers related to drug form potentially applicable to future market profitability rather than the current market opportunity’s profitability configures into firm entry decisions. They point out that while cost advantage of entry dissipates with additional entry rather than the passage of calendar time, additional entry is usually the result of the focal firm’s capacity or resource constraints. When the resources required for entry are strained, expanding the pool of resources that can be devoted to additional projects becomes difficult. For example, a team that is working on formulating a particular drug or guiding it through the manufacturing approval process may only be able to work on a small number of projects at a given time and it may not be easy to hire additional members for the team. Thus, internal efficiency concerns necessarily take precedence in entry considerations of simultaneous nature.

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Gallant et al.’s (2011) findings may also explain why H2 was not supported. The negative coefficient for Institutional Match is intriguing, as it directly contradicts anecdotal accounts by managers in the generic drug field as well as previous research on the importance of complementary assets in the industry (Nerkar and Roberts, 2004; Graham and Higgins, 2008), especially distribution or reputation economies of scope (Scott Morton, 1999; Iizuka, 2009), in reducing the costs of entry. In fact, with the inclusion of the external competitor considerations in the models, only the reverse sign of the Institutional Match coefficient increased, whereas the explanatory power of the rest of the independent variables trended downward. This tendency would lead us to believe that a firm could either be competent in creating and absorbing knowledge spillovers or competent in serving institutional venues, but perhaps not both at the same time. This is a matter that needs to be further investigated in future research.

Thus, this study’s key contribution is to highlight the boundaries of the AMC model.

Although the resource-based view of the firm (RBV) is concerned with the deployment of existing resources as well as the development of these strategic assets (Penrose, 1959; Grant, 1991), few studies in this field actually address issue of how firms decide to deploy them.

Because the AMC focuses on the organizational drivers of firm actions, we believe the AMC model has useful insights for the RBV take on market entry. First, it provides an action/response framework, such that when undertaking competitive action, firms consider rival responses that such action will elicit. In this way, when making decisions that potentially affect rivals, a firm has to take into account the competitive dynamics the decisions may engender, especially how the ensuing activity will threaten the status of the focal firm (Chen and Miller, 1994) upon entry.

As such, it highlights the relational nature of competition, which RBV tends to neglect, though

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for organization and strategy management literature, the primary concern is firms and their relationships (Baum and Korn, 1996).

Secondly, competitive dynamics in terms of the AMC framework introduces the notion that any two firms’ actions can be asymmetric—that is, either’s actions can influence entry decisions of either competitor or both, but both need not act (Korn and Baum, 1999). This conceptualization of firm competitive relationships is missing in RBV, which, although it assumes heterogeneity in performance ―in a population of close competitors‖ (Grant, 1991), still treats these firms symmetrically and never actually delineates a firm’s direct competitor. Yet this conceptualization has rather significant implications in terms of weighing entry decisions in terms of competitive reaction. For one, if competitive reaction is the result of a decision-making process, then the absence of or differences in competitive reactions stem from varying

assessments of competitors’ actions (Debruyne et al., 2010). In other words, the AMC model highlights the intentionality behind firm action and lends a competitive assumption to any

analysis of market entry. Although this aspect was not applicable to our industry context, it does go to show that revisiting the issue in the contexts frequently employed in resource-based

research might be in order. The question asked in this case, then, is: how much do organizational capabilities actually determine the direction of firm expansion, as per the Penrosian growth theory of the firm?

Indeed, Penrose (1959) maintained that the interaction between a firm’s resources and a firm’s managers and the reciprocal influence they exert upon each other shape the ―special productive opportunity of a particular firm‖ (Kor and Mahoney, 2004). Because resources ultimately constrain the actions available to a firm (Fuentelsaz et al., 2002; Ndofor et al., 2011), we subscribe to the notion that ―the firm’s current resources influence managerial perceptions

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and hence the direction of growth‖ (Mahoney and Pandian, 1992), such that underutilized resources and organizational capabilities become obvious via experiential learning (Roberts and McEvily, 2005). Following Lieberman and Montgomery (1998), however, we propose that while a firm’s resource base influences the likelihood of entry, it does so in ways that are complex and poorly understood.

7.1 Limitations and Future Research

Our severest limitation, namely the limitation of the sample size, both in terms of the selection of off-patent active ingredients and the number of local drug manufacturers, owes itself to Taiwan’s relatively small generic pharmaceutical market, and is not as large as we would like in order to ensure the elimination of bias. Consequently, the generalizability of the results may be limited. However, we strongly urge further research comparing both the RBV perspective and the AMC perspective on market entry to be conducted in not simply the generic

pharmaceutical industries of other countries, but also in other industries characterized by sequential entry, in order to further illuminate the antecedents behind entry decisions.

8. CONCLUSION

This paper investigated whether firms distinguish between capabilities-based market entry and competitive/rivalry-based entry in entry decisions. In particular, we examine this question in the context of simultaneous entry games in the generic pharmaceutical industry in Taiwan. We find that, in agreement with previous organization literature as well as the research on generic entry, capabilities-based entry does take precedence over competitive pressures, but that this finding may be limited to industries characterized by simultaneous games. Although the

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industry features allow us to better compare capabilities-based entry and rivalry-based entry, the absence of coordination among markets as a result of the simultaneous game feature makes the AMC model from the competitive dynamics literature defective in our industry context. These findings indicate that future research on market entry should pay more heed to the entry game context and how this will affect incentives for entry. They also point to the need to integrate resource-based research and the emphasis on managerial assessment in decision-making from the AMC model.

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