The role of the state

Similar to Taiwan and South Korea, the Chinese state began to promote biotechnology in theearly 1980s.Butitwasnotuntilthe“863”program (launched in March of1986)that the Chinese state began to claim clearly that biotechnology was one of its seven major strategic targets to develop. Various related programs and plans in its series

“Five-years-plans”wereimplemented afterward (table6).In its10^thFive-year-plan (2006-1010), the Chinese state clearly put biopharmaceutical industry into its six pillar industries for future development, various related smaller programs also been

implemented (BBNDPC 2007:18).

Table6: China‘srelated supporting programsforbiotech

Program year Responsible Ministries Finance base Beneficiaries 863 program 1986 National science and

Technology

Torch program 1988 National and local science and

National key S&T program

1992 National reform and development

1998 National science and technology committee pharmaceutical market in order to stimulate this industry to develop along the international standard. In 1993, the state took a strict regulation approach on the

protection of intellectual property right on drugs, which had deterred in some degrees of the prevalent appearance of copied drugs phenomenon. In 1998, the State Food and Drug Administration (SFDA) took strict compulsory Good Manufacturing Product (GMP) guidelines to regulate the chaotic medicine market, thousands of factories went bankruptcy due to their inability to invest estimated USD$ 3-4 million to improve the production facilities. Also, beginning from 2000, the Chinese state opened its SOEs for foreign investment in order to facilitate joint venture and knowledge learning from abroad.

The major funding for developing biotechnology in China mainly came from various ministries of the government, in which different agencies were responsible for their own targets. The total funding however was very small: it devoted merely RMB$179 million during the period of 1996-2000, which correspondingly co-invested by local governments and SOEs by RMB$ 600 million (Liu and Wang, 2007: 135). Although the spending on R&D of biopharmaceutical products has been increasing over the years, the sum was only a small fraction as compared to the U.S. For example, the Chinese government and related agencies spent about USD$ 300 million in 2001-2005 on new drugs development, which wasonly onepercentoftheU.S.government’sspending on similartargetin 2005 (Liu and Wang, 2007: 173). This amount was also equivalent to only about one month of R&D expenditure by Pfizer. The situation was similar on the side of the firm. According to an estimation, the sum of all the Chinese pharma devoted to new drug development

wasonly aboutRMB$ 560 million,which wasonly 1/13 ofPfizer’syearly R&D budget. No single Chinese pharma spent more than RMB$ 100 million on R&D. The key

biopharmaceutical R&D institute in China, Shanghai Institute of Materia Medica of the Academy ofScience,spentmerely 1/600 thatofPfizer’sR&D budget(USD$ 6 billion) in 2004 (Liu and Wang, 2007: 39-40,). Therefore, although the state strategically promotesthedevelopmentofbiotech,it’sinputofmonetary resourcesarelimited.

4.3.2 The local institutional factors

The Chinese state has regarded biotechnology as one of its pillar industries since the mid-1990s. In order to improve the current situation in which producing generic and copied drugs are the main features of the pharmaceutical industry, the Chinese state now isemphasizing “selfreliantinnovation’principleand encouragestheexisting

pharmaceutical firms to do more frontier R&D and new drug development. The major policy incentiveshavebeen to subsidizefirms’expenditureon R&D aswellas

conventional tax reduction on setting up new firms or other related activities（IDB, 2009:

66-67）。

Chinese firms are mainly of two types: SOEs and small private enterprises which are established mostly by the former employees of public research institutes or by Chinese professionals who have returned from abroad. The existing industrial structure of the pharmaceutical industry is dominated by SOEs that have produced mainly generic and copied drugs for domestic market (table 7). The most famous firms are Harbin Pharma Group（哈爾濱製藥集團）,CSPC(石藥集團), Tianjin Pharma（天津醫藥集團）,Yangtze River Pharmaceutical（楊子江製藥）, Shanghai Pharmaceutical (上海製藥集團),etc.

Because the booming of the economy that generated huge demand on medicines, these SOEs have become large pharmaceutical firms in the domestic markets. Chinese SOEs now produce at least 27 biotech medicines and are expected to launch more products over thenextdecade.Chinaisworld’slargestproducerofvaccines,with an annualoutput more than 1 billion dosage across 41 types. China is also both a large importer and exporter of medicines, especially of active pharmaceutical ingredients (APIs).Moreover, becauseofthecentralstate’sencouragementin establishing industrialparksto create cluster effect, there are about20 biotechnical parks such as those in Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Tianjin, Wuhan, and Nanjing, in which many existing and newly formed biotech firms are located. The general tendency of the SOEs is: they tend to remain in the existing domains of the generic and copied drugs since the market is still in the expanding stage.Asoneauthor(Carpei,2007:104)observes,‘Chinaremains a98 percentgenericmarketwith littlenew productdevelopmentinvestment‘(also,

from foreign firms due to their prosperous future. For example, Harbin Pharma Group gained investment from Warburg Pincus and CITIC Capital Markets of a USD $ 200 million or a 22.5 per cent stake in 2004 (Carpei, 2007:101). This clearly shows the interest of foreign firms to the booming Chinese drug market. Moreover, as Liu, Quian, and Chen ( 2006) has shown that some of the leading Chinese SOEs now are

collaborating with MNCs in order to improve their technologies. One of the cases which they studied has shown that the firm now not only collaborates with

state-sponsored R&D institutes but also import technologies from MNCs through which this firm begins to develop the capability in developing new drugs. In other words, some leading Chinese firms now fully take the advantage of state support to develop new capability.

Table 7 Top 10 Pharma Firm in China（2008）

Rank Firm Business scope

1 HPG (Harbin) Generics, API and biologics 2 CSPC(Shijiazhuang) Antibiotics, Vitamins and 3 SPH（Shanghai Pharma） Antibiotics and Generics 4 Tianjin Pharma API and Generics

5 Yangtze Pharmaceutical Generic andScientificTraditional Chinese Medicine

6 Xiuzheng Pharmaceutical Biologics

7 GPC(Guangzhu Pharmaceutical ) Antibiotics and Generics 8 NCPC (Huabei) Antibiotics and Generics 9 TJPC(Tianjin Jinyao) API and Generics

10 Bayer Schering Pharma Drugs for Cancer/Rare Disease and OTC

Source: SFDA(State Food and Drug Adminstration)「TOP 100 Pharma Firm in China 2008」

http://www.menet.com.cn:8080/News/showNewDetail.action?imId=531a0f4820b1abe50120b1ca32a60004

and these company websites

The new GCC of the pharmaceutical industry nevertheless has impacted the development ofChina’sbiotechnology.Thereareover1000 ofnew sciencefirmsin Chinaand about 300 are located in Beijing and Shanghai that are engaging in pre-clinical researches, or called CRO. There are three types of this CRO. The first is the branches of foreign firms, i.e., Quintiles, Covance, Kendles, which are engaging in works assigned from the home companies. Most of these firms entered China in late 1990s to take the advantage of low cost in conducting clinical trials. The second is joint venture of foreign firms and local forms that are serving both domestic and foreign firms on designing clinical trials. The

third is the emerging local firms that are now competing with the above two types of CRO for both domestic and foreign firms. For examples, Pharmaron (康龍化成), Joinn Laboratories(昭衍), Nutrichem Laboratory(穎新泰康), and AbMax Biotechnology(京天 成). They are either created by local scientists or returnees who had worked in big foreign pharmas before returning to China. These CROs are emerging R&D firms that insert into the GCC of pharmaceutical industry and become a new model in Chinese

pharmaceutical industry (BBNDPC, 2008:31-35)

The Chinese state and local governments are enthusiastically attracting big pharmas to invest into their biotech parks. Until recently, there are some big pharmas already set up R&D centers in China, i.e., Pfizer and Novo Nordisk set up R&D centers in Beijing; also Roche and Glaxo Smith Kline (GSK) established laboratories in Shanghai. The reasons for setting up R&D centers in China are obvious: to take advantage of low cost of scientists and cluster effects; and to envision the prosperous future of Chinese market (BBNDPC, 2008:46). To these foreign firms, due to the lacking of proper protection of intellectual property right, they rarely invest advanced R&D in China, nor have they established network connections with local firms. Therefore, they have not created effect of knowledge diffusion. On the contrary, due to their high level of salaries, these foreign firms can always attract the best talents at the expenses of local firms (Liu, 2008:105).

It seems that China has not developed a clear model in developing its biopharmaceutical industry. The Chinese state clearly intends to nurture its domestic big pharmas in

consideration of massive domestic demands. This clearly shows in both central and local state’spoliciesand theirwaysofimplementing financialsupport.Forexample,in order to attract overseas Chinese to return, the Shanghai city government invested an industrial park to nurture and incubate new science firms created by overseas Chinese. However, the reality has been that most of the funds were allocated to the existing SOEs rather than to the returnees (Sternberg and Müller, 2005), therefore the policy to nurture newly formed SMEs has not been very effective. However, due to the enormous growth of the domestic market, these domestic big pharmas are more interested in expanding their production lines on generic and copied drugs rather than put more resources in

developing new drugs. Indeed, the R&D expenditure for those big SOEs in average is under 5% of their revenues, which is far behind the average international big pharmas of 30-40% level (Liu and Wang, 2007: 285). Therefore, in the long run, these SOEs will have to meet the challenges of innovation.

The emergent new science firms currently have networked within the GCC of

pharmaceutical industry. They however may also have problems on innovation due to their lacking of institutional supports. For one, the new technology and knowledge on biotechnology in China mainly come from R&D institutes, universities, and returnees from abroad. Currently about one third of new science firms were spun-off or buy

technologies from universities and R&D institutes (Liu, 2008:93, 97-98). These firms are small in scale and do not have enough funding to continue to upgrade the technology.

They have to depend on state-sponsored R&D institutes to continue to support them.

Nevertheless, R&D institutes rarely have interested to collaborate with private firms due to their own interest in doing basic research for competition for national research funding.

Therefore, there is not clear linkage between R&D institutes and private firms.

Moreover, in order to receive the support and tax incentives from local governments, many biopharmaceutical firms only cloning chemical drugs rather than producing new biotech products (Webber, 2005:123). They can easily received funds from local

government due to the fact that local bureaucrats lacking the related knowledge, and this even encourages many firms to follow suit (Interview: BTS081101).

In sum, there is no unambiguous innovation system in China on the development of biopharmaceutical industry. It is obvious, according to the existing logic, that Chinese government will assign big SOE pharmas to lead the market and move toward innovation, but until recently, the picture is still murky. The SOEs are more interested in using the existing facilitiesto takeoverthelion’sshareofthebig domesticmarket. Thereare emerging science firms that are linked to the global GCC, they however still need to link more closely to local R&D institutes. As a whole, the innovation system of the

biopharmaceutical industry has been bifurcated. The uncertain situation of China in developing biopharmaceutical industry will continue for some time.

4, Discussion and Conclusion

As discussed above, Taiwan, South Korea and China have taken the advantage of the transformation of GCC of biopharmaceutical industry to develop its related industries. All of the three states adopted favorable strategies to develop biotech industry in the dream of becoming one of the leaders in the future. However, the existing institutional structure has enabled and constrained the paths of development.

For Taiwan, the development of biopharmaceutical industry has been shown in coupling with itsSMEsindustrialstructure.Thestate’spromotion on thisindustry resultsin the emergence of small science firms that have linked closer to the GCC of the

pharmaceutical industry. The existing pharmas are either continuing to produce generic drugs or transforming to develop new drug to link to the GCC or to become CROs. The transformation ofTaiwan’sbiopharmaceuticalindustry to insertinto theGCC hasbeen due to thestate’srecentpromotion.Nevertheless,theemergenceofthenew biopharmas has been mainly beneficial for those small numbers of firms that gained sufficient

monetary support from the state. They neither have the possibility to create an industry, nor do they have the capability to generate organic linkage with the domestic generic

drug firms that is necessary to breed bright economic future.

AsforSouth Korea,thestate’spromotion ofbiotechnology hasnurtured many chaebols, LG Life Science and SK and medium-sized as well as new small science firms to emerge to develop to link to the GCC. The transformation of the Korean state from the

developmental model to the innovation model has nurtured many new biopharmas to emerge. Nevertheless, the new drug developments are still dominated by few chaebols, and they still have to license the new candidate drugs to U.S. firms to apply for FDA in the U.S. and to market them by the U.S. brands. The Korean state clearly wants the chaebols to engage into new drug game in order to generate a vertically integrated industry, which is not yet seen at the current stage. But at this moment, the Korean model is still a chaebols dominated one but with more diversified approaches. In these three countries, the Korean model so far has achieved more successful cases on new drug development than have the other two countries.

As for China, there is no clear model on the development of biopharmaceutical industry.

The state has promoted the industry through various policies, and which mainly has beneficial the big SOEs to become even bigger. It is obvious that Chinese government will assign big SOE pharmas to lead the market and move toward innovation. These big pharmas however have little monetary incentive to devote to new drug development due to the booming of the economy. There are emerging venture firms that have come into being through the support of state policies and linking closely to the GCC, they however still need to tie more closely to local R&D institutes. The uncertain situation of China in developing biopharmaceutical industry will continue for some time.

There are some salient institutional features that influenced the development of biopharmaceutical industry in these three countries which deserved further

observations. First of all, the timing the transformation of state policy has largely affected the development of biopharmaceutical industry. For example, South Korea is the earliest among the three countries that implemented the alike Bayh-Dole Act, or

“LawforSpecialMeasureto SupportVentureBusiness”(1997),which wasfavorable for the emerging small science firm to engage earlier in new drug development than other two countries. Therefore, the Korean firms have more observable results in receiving FDA approval than those in the other two countries. In other words, the Korean state is the earliest case in abandoning the developmental state model in pursuing for an innovation model. Taiwanese state adopted this model only in 2007, whereas in China, it is still using the developmental state model, by using SOEs to develop biopharmaceutical industry.

Secondly,theweightofthestate’sinvestmentisalso importantin cultivating new drug development. In South Korea, the public sector has invested about 10% in all of R&D expenditure on biopharmaceutical industry. In contrast, the states in Taiwan and China have invested relatively small as compared to that of South Korea. The

insufficient capital investments have not been able to created fruitful results in developing new drugs in these two countries.

Theabovethreecountries’developmentofbiopharmaceuticalindustry indicatesthat they are all pursuing for industrial upgrading toward innovation. All these three states have made ambitious policies and put some amounts of monetary support to develop biotech industry. But due to domestic institutional arrangements, they have shown different paths of development and innovation patterns in utilizing the opportunity of the segmentation of GCC in biopharmaceutical industry. The states in East Asia are indeed intended to reshape their economic miracle, but the paths are not of their own determined. History and institutions are still mattered!

References

Amsden, A. (1989) Asia's Next Giant: South Korea and Late Industrialization. (New York: Oxford University Press).

BBNDPC (Beijing Bio-technology and New Drugs Promotion center) (2007) Take-off: