Foreign pharmaceutical firms' FDI entry strategies into China

Foreign direct investment (FDI) in China is popular these days and this also applies to the pharmaceutical manufacturing industry. China seems to be a promising market for pharmaceuticals with over 1.2 billion potential consumers. This huge number of people together with the outstanding economic performance attracted multinational pharmaceutical firms that were looking for a new market for their products. By the end of 1998, China had established over 1,500 pharmaceutical enterprises with foreign investment and 117 of which were invested by foreign pharmaceutical firms. Foreign pharmaceutical firms invested their capital and technology in what is likely to be developed as the world's largest pharmaceutical market in the future with the expectation they will earn an excellent return in the longer term. When a firm decides to establish an overseas operation, it has to decide whether to pursue the venture alone or with a joint venture partner (Bell, 1996). For most manufacturers that want to invest abroad, the first-best entry strategy remains the sole venture (SV), and joint venture (JV) would be a second-best invest entry strategy (Root, 1994), because JV is inferior to SV which allows investing firms to maximise the returns on ownership-specific advantages (Caves, 1982) and to have full control over the business operations. Foreign pharmaceutical firms who invested in China during the period from 1980 to 1998 basically chose either a SV or JV entry mode, and over 84 percent of the foreign pharmaceutical firms chose a JV entry mode rather than a SV, even though foreign investors have been allowed to set up 100 percent solely foreign owned sole venture operations in China since the passage of 'Law of the People's Republic of China on Foreign Capital Enterprises' at the Fourth Session of the Sixth National People's Congress on 12 April 1986. This research was designed to investigate why the large majority of pharmaceutical firms preferred the second-best entry mode for entering into the Chinese market. This research has incorporated in Root (1994), Mockler and Dologite's (1997) conventional foreign market entry mode framework, and the relevance of Kumar and Subramaniam's (1997) contingency entry mode framework is acknowledged. Fieldwork was mainly conducted in China by personal interviews as well as mail questionnaire surveys over a period of three months in 1999 and 44 companies participated in total. Using multiple indicators by means of logistic regression analysis to examine the effects of groups of factors on entry mode decision choice between SV and JV options. Seven groups of factors (independent variables) were examined: China environmental factors, China market factors, China production factors, parent firm's home country/region factors, parent firm's product factors, parent firm's resource commitment factors, and parent firm's decision task related factors. This research has found that the probability for establishing joint ventures with Chinese partner (s) is significantly and positively related to the importance of China environmental factors and market factors. Parent firm's decision task related factors had a positive impact on firms' decision to choose a SV entry mode. Bivariate analyses have also discovered a number of individual variables that had significant impacts on firms' entry mode choice decisions. The research did not show sufficient evidence to support that China production factors, home country/region factors, parent firm's product factors, and parent firm's esource commitment factors had significant influences on foreign pharmaceutical firms' entry mode decisions, although the results showed expected directions of the relationships between the entry mode choice and independent variables. This research has contributed to the entry mode theory literature in the way of developing, as the result of the research in this thesis, an eclectic framework for better understanding of theories in choosing an entry mode between a sole venture and a joint venture in the context of foreign direct investment into the Chinese market, particularly it has discovered significant variables that affected the foreign pharmaceutical firms' FDI entry mode decisions into the Chinese pharmaceutical manufacturing industry during the period of 1980~1998. The framework can be used as a base by researchers to develop further the theories of foreign market entry strategies and to test its relevance in other industries or countries. This research has also extended its examinations to some other important issues in relations to foreign direct investment in China. They are the difference between early and late entrants, and between eastern and western firms on FDI entry mode decisions, foreign pharmaceutical firms' FDI decision formulation, FDI implementation, FDI performance evaluation, joint venture partner and operation location selections in China were also analysed and discussed in this thesis. Further research with larger sample size into the interrelationships among strategic FDI decision formulation, entry mode choice,strategy implementation and evaluation would be worthwhile to help understand the entire process of strategic FDI planning and implementation.