Transnational corporations and local capital: Comparative conduct and performance in the Turkish pharmaceutical industry

’ World Development, Vol. 14, No. 4, pp. 503-521, Printed in Great Britain.

0305-750x/86 Pergamon

1986.

$3.00 + 0.00 Journals Ltd.

Transnational Corporations and Local Capital: Comparative Conduct and Performance in the Turkish Pharmaceutical Industry ARMAN S. KIRIM* University of East An&a, Norwich,

UK

Summary - The comparative conduct and performance of TNCs and domestic enterprises in LDCs has been an issue of continuing debate and research. Further empirical evidence is still greatly needed. In the particular case of the pharmaceutical industry, however, relatively little attention has been devoted to the evaluation of the relative conduct and performance of domestic firms. The existence of a large locally-owned sector in the Turkish pharmaceutical industry renders such an evaluation possible. The paper examines the comparative behavior of TNCs and local firms over five distinct areas, namely, technology choice, export performances, “appropriate” marketing, products, and prices. It concludes that in the majority of these areas behavioral similarities predominate over possible differences.

1.

INTRODUCTION

The conduct and performance of transnational corporations (TNCs) in the economies of Third World countries has been an issue of continuing debate. The main theme of this debate was whether or not the business behavior of TNCs was “appropriate” in terms of the prevailing social and economic conditions in these countries. A major sub-problematique in this “appropriateness” debate is the question of whether local enterprises are better performers than the TNCs in a number of major areas of concern. Even though substantial research has been generated within the context of this problematique, the existing evidence is still contradictory in nature and hence does not permit clear-cut conclusions regarding the issues raised. Furthermore, in the specific case of the pharmaceutical industry, while the focus of attention has been on the “inappropriate” conduct and performance of the TNCs, relatively little attention has been devoted to the comparative behavior of the locally-owned sector of the industry in developing countries.’ The main reason behind this was that the industry had been widely denationalized in many Third World countries with the role of local capital being minimized. The existence of a large locally-owned section in the Turkish pharmaceutical industry makes an evaluation of the behavior of domestic enterprises possible.2 503

.. This paper has two simultaneous objectives. Firstly, it considers the validity of the contending arguments regarding the comparative behavior of local vs foreign firms at the microeconomic level. Secondly, it evaluates the performance of the locally-owned sector of the Turkish pharmaceutical industry (which accounts for a larger share of industry sales than TNC subsidiaries). In Section 2, some of the major areas of the above mentioned debate are briefly outlined and the existing empirical evidence is considered; in Section 3, the results of the empirical study of this paper are presented; and, in the final section, some conclusions are drawn from these findings.

2. TNC PERFORMANCE WORLD

IN THE THIRD

This section outlines some of the major areas of the debate over the relative performances of TNCs and domestic enterprises in LDCs, namely, (i) technological choice, (ii) the issue of appropriate marketing, (iii) the issue of appropriate products, (iv) the issue of appropriate prices, and (v) the export performance of TNCs and local firms.3 *I am grateful to Rhys Jenkins for tions; assistance of the TPMA is also this article was written, the author University of Warwick, Coventry,

invaluable suggesappreciated. Since has moved to the UK.

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TNCs AND

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local drug firms will benefit equally from the nonprescription consumption of ethical drugs so long as this contributes to increased sales. Yet most writers, though somewhat implicitly, have attributed this to the inappropriate marketin practices of TNCs in Third World countries. 5 Second, there can be no piausibie expianation as to why local drug firms would not resort to excessive claims if this is one of the rules of competition in the industry in a particular country. Gereffi (1983), however, after surveying some evidence on these issues, but without actually presenting any evidence as to the comparative marketing performances of local firms as against that of TNCs, argued that “in several areas TNC performance was shown to be less efficacious than that of comparable domestic firms” (p. 204). Indeed, on this particular issue, the common belief has usually been that it is solely the TNCs which are responsible for the negative consequences of pharmaceutical production and exchange in LDCs. Concentrating solely on the performances of TNCs, and not subjecting to scrutiny the behavior of local firms, may lead to incorrect policy formulations with all its harmful consequences for the consumers (patients) in Third World societies.

(c) Appropriate products Both the issues of appropriate technologies and appropriate marketing practices are closely related to the issue of “taste transfer” by TNCs to Third World countries. Indeed, it seems to be a fact that the product mixes of TNC subsidiaries in LDCs are highly similar to their parents’ product structures in developed countries. In fact, there is ---_-- __.^on -_ AL_ -crl__ a geiiem I C”Ilb~“S”S L‘lt: 1__.._ 1SS”t:“1 me _____J.._ rtpouuction of developed country consumption patterns in LDCs, because the possession of specific product technologies as well as strongly differentiable products with powerful trademarks are considered to be among the major factors which underlie the overseas expansion of TNCs (see Jenkins, 1984, pp. 216-221; UNCTC, 1978, p. 40; Sunkel, 1979; Chudnovsky, 1979b). Conse. .. . ..*1.. :* ,.,... I%, a.,..,.,.+-rl +I.,* que,,L’y, II Cdl, VT;entKX#&” LllaLThTP 1I”L ,...l.,.:l:“r:,.^ J”“sI”I*LIIFJ will predominantly be engaged in the marketing of those products in which their parent companies possess market power and derive substantial profits from in the world economy (Langdon, 1981, p. 48). The transfer of developed country consumption patterns to LDCs may have many adverse consequences for their economies.’ As far as the pharmaceutical industry is concerned, the issue of transfer of inappropriate

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product patterns to LDCs largely refers to the imbalance between the existing disease structures at any one time in these countries and the disproportionately large consumption of drugs which do not provide remedies for the prevailing ailments, but which are generally used for the treatment of minor diseases in terms of both their frequency of incidence and of the fatality of their consequences. Gereffi (1983, p. 198) defines the “appropriateness” of pharmaceutical products according to two criteria: “( 1) their effectiveness in reducing mortality and morbidity rates in a nation, and (2) the degree to which the distribution of pharmaceutical sales by therapeutic groups matches the disease pattern in a country.” Thus, on the basis of these criteria, TNCs are usually held responsible for transferring inappropriate drug consumption patterns to LDCs through both their production structures and their persuasive advertising techniques, and for leading to maltreatment of existing diseases in these countries (see Gereffi, 1983, pp. 198-200; UNCTAD, 1977, pp. 34-42). However, as in most other areas of concern with TNC performance, here too the arguments are largely counterfactual in that they are generally based on the experiences of countries where the pharmaceutical markets were extensively denationalized. Hence they are not founded upon any analysis of comparative product structures of TNCs, and local pharmaceutical firms. The next section, therefore, considers these issues by providing an analysis of the nature of products produced by TNC subsidiaries and comparable local drug firms in the Turkish pharmaceutical industry. (d) Appropriate prices As for the “fairness”, or appropriateness, of the prices charged by transnational drug companies in Third World countries, there is also a lack of similar comparative analysis, with the widely accepted argument that the prices of TNC drugs are excessive, and implicitly, higher than those of local drug companies. The only exception to this is the study by Chudnovsky (1979a) .Wll” ..i.r. a,g;ueu “_“..,A +l..,* ~rrr~..6:..~ ,l.n..-,,,..r:,,., Lllal :.. 1.1*I.LLIC: ‘-X,gerlrl‘re ~uall,,a~eurr~nr industry the average prices charged by local drug firms for drugs in two therapeutic groups - as well as for all products - were higher than those charged by TNC subsidiaries. Even though his findings point to some interesting aspects of the issue of comparative performances of TNCs and local firms, Chudnovsky’s study suffers from a major methodological flaw which renders his conclusions unacceptable. By averaging the

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prices of all drugs, and not taking into account the differences in the cost of active ingredients of these drugs as well as the differences in costs of production of different drugs, he compares items which are in fact not comparable. Thus, for example, when averaging the prices of tranquil:____ Uru”u”“sny CL..>--..-I... ^_.^_^^^^ &I__ -_:,.-,. “1 -c dll ,.I, sue,, ,..._I_ UClb, averages Illt; tJI,LT;S drugs which may differ widely in terms of their cost of production. Tranquilizers include, among others, diazepams, medazepams, oxazepams, nitrazepams, chlorpromazine, mezoridazine, fluphenazine etc. which are all minor or major tranquilizers and which, despite similarities in the production techniques, may entail different cost/ price structures. With the exception of Chudnovsky’s study, and as pointed out above, the general consensus seems to be that TNCs charge higher prices. This argument is explicit in Gereffi (1983, p. 197), where he argues that higher TNC prices are due to overpricing caused by transfer pricing practices. By quoting Deolalikar ( 1980, pp. 86-87), he further claims that domestic firms are not involved in overpricing practices and, in addition, their vefy existence ensures that the transfer pricing activities of TNCs are checked. Even though the practice of transfer pricing as such is, exclusive to TNCs, economic by definition, theory does not predict that overpricing of final products will be exclusive to foreign-owned firms8 In fact there is no reason on theoretical grounds to expect the local firms not to engage in overpricing activities if this proves to be more beneficial for the enhancement of their accumulation. For correct policy formulations the possibility of overpricing by firms of all nationalities needs to be taken into account and they must all be subjected to scrutiny on equal grounds. (e) Export performances of TNCs and local firms Since the mid-1960s, exports of manufactures from Third World countries increased sharply, with a small number of LDCs accounting for the majority of total Third World manufacturing exports (see Nayyar, 1978, p. 61; Lall, 1981, pp. 174-177). The continuing trend in Third World manufacturing exports aroused interest in recent years among economists concerning the role that the TNCs have layed in the achievement of this export growth. !? While the supporters of the TNCs argued that they could be powerful agents of export growth, for some critics their domination over the markets of LDCs was a major factor in leading to the slow growth of exports, because the operations of TNC subsidiaries were pre-

dominantly oriented towards the internal market, and the export possibilities of these firms were checked by clauses of territorial restrictions. For some others, even though a significant role is attributed to TNCs in the expansion of Third World exports, the overall consequence of *I_:_ :.. ‘lever -_..__rL_I__” ^^_- &_ :____-_:-- exLe,llal -..r_--_I uus 1s Luelebb seer, LOl__ “t: mcreasmg dependence, with limited direct or indirect benefits (see Jenkins, 1979, pp. 90-91 for a survey). The controversy over the theoretical sphere exists in equal strength in the empirical findings. Some writers found that foreign firms were occupying an important share in the manufacturing export growth of LDCs (Newfarmer and Marsh, 1981 for Brazil; Lall, 1981, p. 207 for Singapore; Jenkins, 1979, for Mexico), while some others argued that the TNC share of Third World manufacturing export growth was relatively small (Nayyar, 1978, p. 78). A related issue of interest has been the relative export performance of domestic enterprises. On this issue too the empirical evidence is highly fragmented and contradictory. Thus, while some studies found that local firms were better performers than TNCs,“’ others reached the conclusion that the export propensity of forei n firms was greater than that of local firms, rP while some others found no conclusive evidence regarding the relative performance of TNCs and local firms.12 The importance of the growth of exports lies in the contribution it makes to solving the balanceof-payments problems of Third World countries. As far as the pharmaceutical industry is concerned, however, the export of finished products and active ingredients is also vital for the development of their fine chemical industries considering the generally limited sizes of many LDCs’ domestic markets (OECD, 1975, p. 73). “unless they can export, the marConsequently, ket rc=rtain fin,= rhwnirak &._. fnr L”. .,“..U.L. ..&&_ _.&_ . . . . _..... wi!! be ifi&fi&ni. Thus, even if the technology for production of these fine chemicals was available, market constraints would render their production uneconomic” (ibid.). Due to the additional importance of the second factor for increased local accumulation - and for economic development - it is necessary to evaluate the relative contributions of the TNCs and local firms to the growth of nharmaceutica! exoorts. r ~---~ In the next section, the export performance of TNC subsidiaries is analyzed and compared with that of the Turkish drug firms. Clearly enough, a microeconomic study of this sort cannot expect to contribute very much to the debate outlined above. Furthermore, even though the export of drugs has been of major importance for the firms based in advanced countries,” the growth of pharmaceutical exports has not been as substan-

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tial in LDCs as other major manufacturing export items (see Lall, 1981; Kirkpatrick and Nixson, 1983). Nevertheless, since it can provide empirical insight into the issue, the analysis is still worth pursuing. In the following sections, aggregate data on the export propensity of foreign firms in the Turkish industry, based on other studies, will also be presented.

3. PERFORMANCES OF TNCs AND LOCAL FIRMS IN THE TURKISH PHARMACEUTICAL INDUSTRY This section examines the validity of contending hypotheses over the relative performances of TNCs and domestic enterprises in the case of the Turkish pharmaceutical industry. The statistical data of the study come from a number of sources. The first set of data which includes sales, assets, vaiue added, empioyment and export figures are obtained from the survey undertaken by the Chamber of Industry of Istanbul (hereafter ISO, 1984), and published for the 500 largest firms of Turkey as of end 1983. Of the existing seven TNC subsidiaries,14 only four appear in the list of the 500 largest firms, even though the rest of the firms comfortably qualify for that list. This is due to the reluctance of certain TNCs to publish their figures, and hence their appropriate rankings were left blank. Of these three pharmaceutical TNCs information on two could be obtained through correspondence with TPMA (Turkish Pharmaceutical Manufacturers’ Association), as well as from the replies sent to our questionnaire.‘s For the United German consortium (BIFA), no information could be obtained for 1983 for capital-intensity measures, as we learned that it was a recent policy of the parent corporations not to disclose any information in Turkey. For other measures, however, data was still available. The second source of data is IMS reports for various years which provide information on product specialities and therapeutic market participation for all firms in the industry (including BIFA). For the purposes of uniformity with the next set of data, however, instead of all the firms in the industry, only 24 leading firms were included in the following analyses. These 24 firms, in turn, accounted for around 90% of industry sales in the period 1982-83. The third set of data, which is available for 23 firms is unpublished, and based on the survey undertaken by the TPMA in 1980 on the number of sales representatives employed by the firms in the industry. Additional information for a major local manufacturer was also obtained during

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interviews, with which the total sample rose to 24. Samples sizes of 13, in the case of the study of technological choice, and 24 in others may initially seem to be relatively small, and hence conclusions require to be interpreted with caution. Nevertheless, as most TNCs together with the largest local firms (which altogether account for over two-thirds of market sales) are included in the first case, and all the major firms with all TNC subsidiaries in the latter cases, the sample can be considered to provide a true representation of the industry. In the analysis of technological choice and appropriate marketing (i.e. product differentiation and promotional intensity), the statistical technique used is ordinary least squares regression method. The hypothesis of inappropriate TNC products, in turn, is tested by using chisquares distribution and Spearman rank correlation. The figures for export propensities, on the other hand, were self-explanatory. The following subsections summarize the findings and discuss the relevance of the contending hypotheses advanced above. (a) Choice of technology This section tests the validity of the argument regarding the reiationship between the nationality of ownership of firms and the capital intensity of production. Being a microeconomic study, to repeat, no generalizations are attempted across sectors, and the conclusions are interpreted only at the level of the sector under study. However, being based on a clearly defined industry with closely matching product mixes across firms, and with similar engineering constraints, the results can provide useful empirical insights into the complexity of the technological choice decision. The variable used for the measure of capitalintensity is KLR, the ratio of total assets to total wage employment. In the ideal case, fixed assets rather than total assets should be used in measuring capital intensity, but the level of aggregation of the data did not permit us to use that measure. To compensate for the shortcomings of the KLR measure, a second variable, KLRZ (V/L), which expresses the ratio of gross value added to total wage employment, is also introduced. This measure is argued to be a better measure of labor and capital intensity by Larry; nevertheless, it too has a number of weaknesses (see Bhalla, 1975b, pp. 20-23). As an ownership measure, a dummy variable (NAT) indicating foreign and local ownership

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was used (zero if Turkish, one if a TNC subsidiary). A positive sign for NAT would indicate a higher capital intensity for TNCs, and vice versa. Two additional control variables were also introduced in the KLR equation; in the KLRI equation, only one such variable is used. Tine first of these variabies is the SiZE of firms, measured in total gross operating revenue. The size of the firms may influence the decision not only for technological choice, but also for all other behavioral aspects to be examined below. Secondly, as suggested by Marsh et al. (1983, p. 17), the level of vertical integration may also be an influence on the overall capital intensity of the firms. Hence, variable VERTIN, which is measured by the ratio of value added to sales (see ibid.), is also introduced. Table 1 presents the regression results. In the first equation, the sign of NAT is positive, initially indicating that TNCs may be employing more capital-intensive techniques. However, the t-value is not significant, indicating that no discernible relationship between the capital intensity and the nationality of firm ownership exists. The influence of other variables (in the equation) on technology choice was also not substantial as indicated by the very low values of R2 (6.6%) and F-statistic. Likewise, in the second equation (i.e. KLRl), neither the nationality of ownership nor the size of the firms appears to be significantly influencing the capital-intensity of production. All these findings, therefore, tend to support the view expressed elsewhere (Kirim, 1985b; also see Jenkins, 1984) that similarities in technological choice between firms of all nationalities tend to outweigh the possible differences.

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variable

N _____

There seem to be at least two main reasons which can account for the observed similarities in the technological choice of the leading foreign and local firms. The first relates to the initial reliance of all firms on imported machinery and equipment -the pharmaceutical firms in Turkey ., .a report mar mere were no aiternative production processes to choose from initially (see Erdilek, 1982, p. 71). Thus, at the first establishment stage while the TNC subsidiaries imported their machinery and equipment from their parents and capitalized them in the country, local firms too relied on the import of machinery and equipment from abroad, and both groups of firms continued to import additional equipment (Unver, 1980, p. 14). In later stages, as local production of specially automated packaging machinery advanced, all firms began to use this machinery due to its flexibility and adaptability to local conditions. The second, and perhaps more important, factor which can explain the observed similarities in technological choice is the wave of increased automation of drug firms throughout the 1970s. This, overall, contributed to the increasingly capital-intensive nature of production in the Turkish pharmaceutical industry (FFYDP/ OIKR, 1983a, p. 22). Largely due to the increased labor unrest throughout the 1970s most of the drug firms, local and foreign alike, chose to switch to more automated techniques of production, if only because “machines are easier to get along with than people” (Winston, 1979).16 The major consequence of increased mechanization, as would be expected, has been a sharp drop in industry employment, which fell from 14,572 employees in 1975 to 8,624 in 1980, with

Roororcinn .I . ..C6,.““.“,.

SIZE

NAT

rorrrltv ..“_ . ...

VERTIN

F

0.066

I.285

0.063

0.584

KLR

13

5.379 (1.816)

0.618 (0.121)

KLRl

15

0.081 (0.657)

0.706 (0.882)

1rlo/lnrc i\““ll

24

7&.&,,,I ?&P (5.375)%

mm;)’

II <<,I “.d_Iv

Id **I a-.7,11

DETINT

24

2.429 (6.256)*

-3.435 (0.432)

0.658

22.197

PRODIV

24

1.381 (5.297)*

- 12.087 (2.407)*

0.545

14.202

Notes: Variables are defined in the text; r-statistics in brackets; 5% level (two-tailed test); N denotes number of companies

-0.018 (1.914)

R’

r-statistics are marked * if they are significant included in the sample.

at

TNCs AND

LOCAL

CAPITAL

IN THE TURKISH

8,232 people employed in the formulation industry, and 392 in active materials production (FFYDP/OIKR, 1983a, p. 21; production values for 1975 and 1980 are 294.3m and 370.8m boxed units, respectively, TPMA, 1984, p. 27). Currently it is estimated that the industry employs around 9,300 people, of which 2,793 (30%) are accounted for by the TNC subsidiaries, and the rest (70%) by locally-owned firms. Considering the small number of foreign firms in the industry, however, their contribution to total sector employment seems to be sizeable. As for the relative roles in employment displacement (which is a very important consideration), unfortunately no figures are available at the firm level for 1975, and hence no comparisons are possible. (b) Appropriate marketing This section evaluates the comparative performances of TNCs and local firms with respect to their marketing practices. Two main aspects of appropriate marketing arguments are considered. Firstly, the extent of involvement of TNCs and domestic firms in product differentiation activities as reflected by the numbers of products introduced is examined, and, secondly, the extent of product differentiation as reflected by the degree of promotional activity is considered. Continuous product introduction is one of the major competitive strategies employed in the pharmaceutical industry. In LDCs, however, resort to this competitive strategy usually means that the products developed elsewhere will have to be diffused locally with nearly no feedback effects on the development of domestic technological capabilities. Pursuing this strategy furthermore leads to the proliferation of brands, and increases the need for further advertising and sales promotion to complement the firms’ product differentiation efforts.” Since in many Third World countries the pharmaceutical industry has been widely denationalized (see UNCTC, 1979, p. 115, Table 8), these marketing practices were largely attributed to transnational drug companies, and the latter were held responsible for all the negative ” _. consequences of tne wastefui marketing practices which are in fact integral to the existing pattern of accumulation in the pharmaceutical industry no matter what the nationalities of the firms are. As there exists in the Turkish pharmaceutical industry a viable locally-owned sector which accounts for the major share of industry output and sales, it provides a good test case for evaluating the validity of the above arguments. The statistical technique used for hypothesis

PHARMACEUTICAL

INDUSTRY

509

testing in this section too is the least squares regression method. The first dependent variable designed as a proxy for product differentiation is PRODIF, which measures the total number of brands marketed by each firm as of April 1983. This variable indicates the extent of contribution of the firms to brand proliferation. The independent variable used for the test of ownership influence on product differentiation is a dummy variable, defined in the manner described in the previous section. A positive sign can be predicted for NAT if the hypothesis that TNCs pursue a more intense new product strategy than domestic firms and lead to spurious product differentiation is true. Also, a control variable SIZE is included (as in the last section), because it can be expected that firm size may be a crucial factor which determines the decision regarding the range of products to be marketed. The second proxy used for product differentiation is the extent of detailing activity, DETINT, measured by the total number of sales representatives employed by each firm. To be precise, a more competent measure of the extent of product differentiation would include detailing expenses as well as journal and other advertising. However, journal and other professional advertising is relatively rare in LDCs, and the weight of promotional activity generally falls on sales representatives (Katz, 1974, p. 39; UNCTAD, 1981, p. 6). Even so, the above measure still has a shortcoming because it does not include other detailing expenses as free samples, gifts, handout material etc. Unfortunately, no data were available on these. Nevertheless, as the detailmen’s salaries and expenses constitute by far the largest part of any firm’s total promotion budget, the measure at hand is thought to provide a useful approximation of totai saies promotion expenditures. As above, the DETINT variable is also regressed on the nationality of ownership and on firm size. Results are presented in Table 1. As far as the extent of product proliferation (PRODIF’) is concerned, both variables, that is SIZE as well as NA7ionality of ownership seem to be closely associated with this aspect of product differentiation in the industry. The sign of NAT is negative, indicating that iocai firms market more products than the TNC subsidiaries; and the t-values indicate that the relationship is significant. A stronger influence on product differentiation, however, appears to come from the size of the fims, larger firms marketing more products than smaller firms. Overall, large locally-owned drug firms tend to produce and market significantly more products than the TNCs.‘s Information regarding the number of products

510

WORLD

DEVELOPMENT

marketed by the seven largest local drug firms and seven TNC subsidiaries indicated that in 1983, the leading local firms sold 391 different drugs in the market (counting one dosage form for each drug), whereas the matching TNC subsidiaries sold 256 different drugs in the same .\nr;firl ,.tl.or .lv”I”J( ..nrrl~ thfi n..mhnr nf Arnnr cnlrl ,l.C .,UI,1”L, “I “1 up J”lU i&&L”“.Tn 1.1“LIIbI per firm was 55.8 for domestic enterprises, and 36.6 for TNC subsidiaries. All this clearly indicates that in the Turkish pharmaceutical industry, contary to the arguments of many observers, it was not the TNCs who introduced a larger number of new brands to the market; rather, it was the local drug firms who resorted more to this method of product differentiation. In fact, this was one of the main determinants of success of local firms vis-d-vis the TNCs in the Turkish industry. Within the favorable environment provided by numerous state policies, and mainly the ban on new foreign investment and the abolition of patents (see Kirim, 1985a), Turkish drug firms based their marketing strategy on introducing a relatively large number of products in many more therapeutic fields than had TNCs. By either obtaining raw materials from independent suppliers, or by obtaining licenses from many different TNCs, each of which specializes in distinct therapeutic areas, local firms could diversify their risks into many therapeutic fields. They could thus overcome many TNC advantages by not being similarly constrained by the therapeutic area specialization of a single parent corporation.‘” As a result, local firms could enter into many therapeutic fields whether or not thay had previous marketing experience. In 1983 the average number of therapeutic markets that the leading local firms participated in was 38, as against 26 therapeutic markets per firm for the TNC subsidiaries;“’ As a further step to evaluate the relative marketing behavior of TNCs and local firms, the relationship between the ownership of firms and the extent of the diversification of their products to different therapeutic fields was studied by regressing the latter (PRODIV) on both ownership (NAT) and the SIZE of the firms. As can be seen in the last equation of Table 1, strong negative association between NAT and PRODIV exists indicating that local firms are indeed more diversified than TNC subsidiaries. The comparatively larger numbers of drugs sold by the local pharmaceutical firms could initially imply also that their extent of involvement in new product activity is greater than that of TNCs. What it does not tell, however, is whether the new product activity undertaken by these firms is based on the introduction of

genuinely new products, or whether it is basically competition,” based on the a “substitute introduction of imitations of the drugs which are already existing in the market. In the latter case, the new product activity can be considered to be no more than spurious product differentiation L.-t ;r, +i.P f,T,-_P.. ,.c.‘.n tkn w.w.A..~t Affc,v-‘x”t;~_ ULIL~I~IIIILLVU,) 111 LLIb I”1111bI ca.Tti, 11.b yl”“uLL tion efforts may result in considerable benefits to society. Table 2 below shows the extent of new product activity undertaken by all firms in the pharmaceutical industry in Turkey in the period between 1975 and the first quarter of 1983. The data cover 211 new products out of the total of 239 products introduced in the period concerned because of the difficulties encountered in determining the generic identities of some new as well as existing drugs. Of these 211 new products, 57% were new brands which were exactly duplicating the existing ones, 7% were new combinations of existing compounds, and only 36% were new chemical entities which were not being produced by other firms in the market. This indicates that, overall, the benefits that could be achieved by the domination of the industry by the locally-owned firms were not as large as many critics would have expected. Thus, in a market where the share of local capital is substantial, substitute competition, which has generally been associated with TNC dominance, comprised an overwhelming proportion of the overall new product activity. What is more, domestic drug firms were apparently engaging in substitute competition more than the TNC subsidiaries. Thus, of 166 new products introduced by local drug firms in the period concerned, 70% were either the new branded versions of the drugs which had already been supplied by other manufacturers,21 or, they were the new combinations of existintI0 rnmnormdn ----- r------ in the local m_arket; And, surprisingly enough, TNCs seemed to be involved more in genuine new product introduction than their local counterparts.22 As far as the second measure of product differentiation (i.e. extent of detailing activity) is concerned, similarly no superior performance on the part of domestic firms could be observed. In Table 1, the influences of ownership and firm size on DETINT are shown. The regression results indicate that, once the differences in the size of firms is controlled, no discernible relationship between the nationality of ownership of the firms and the extent of detailing activity exists. Thus, generally, the larger the firms are, the larger the extent of their promotional expenditures, regardless of nationality. Nevertheless, it must be emphasized that, despite the observed similarities between local and foreign drug firms in this

TNCs AND LOCAL CAPITAL

IN THE TURKISH

PHARMACEUTICAL

511

INDUSTRY

Table 2. Total new and duplicateproducts introduced, 197543 Products introduced by TNCs Number Percentage

Products introduced by local firms Number Percentage

1. New brands with a new compound 2. New brands exactly duplicating 3. New brands of combinations

27 15 3

60 33 -7

49 105 12

30 63 -7

Totals

45

100

166

100

Source: Own analysis of IMS data, and Ilac Rehberi (Physicians’ Desk Reference of Turkey) 1982.4983. Data

cover all firms. peutic categories. However, because the pharmaceutical industry is characterized by considerable demand manipulation activities,26 this information is bound to be biased. Nevertheless, as these two are usually the only available sets of information, as well as the most commonly employed basis for measuring appropriateness, see Section 1 (c), we shall have to base our examination of the relative appropriateness of TNCs’ and local firms’ drugs in terms of the prevalent disease patterns in Turkey on these two criteria, i.e., appropriateness in terms of major disease-related deaths, and in terms of the structure of overall drug consumption by therapeutic categories. These (c) Appropriateproducts being the criteria for appropriateness, the product structures of TNC subsidiaries and eight This section considers the argument that TNCs leading local drug firms were compared, and the produce/market inappropriate drugs in Third distribution of their sales and total products by World countries. Before pursuing the comparadifferent therapeutic areas are shown in Table 3. tive study, however, it must be emphasized that The data indicate that in seven out of 10 the issue of “appropriateness” necessarily entails therapeutic groups, local firms were producing a great deal of subjectivity, and hence the overall more products than TNC subsidiaries. appropriateness of drugs for Third World coun;.. +I.,,:#.,:,.. “I ,.c +l., A,.-,“+:,. “lug rl_.._ .L‘lGJ ..Z.” 1J :n ll”L ..,., PI‘ . . 1JJ”G :......a ..,I.:,& ,.,.” I..,-#-*,--:..,A .Wll‘l . ..*L. TL..c 1‘1UJ)11‘ L11G rlra*““Ly L‘1S,.,.C_^ LaJsJ( ““‘IIGXIL WLIILII call “6 “GLGlllllllG” firms were not only producing similar products to ease. What can be considered an appropriate those of the TNCs, but in fact the numbers of drug for a particular Third World country may such products were larger than TNCs’ products. not be at all appropriate for another.24 The relative success of local firms in the Turkish Additionally, there are measurement problems. In the ideal situation, appropriateness of pharmaceutical industry has, in fact, been related to their production of similar products to those of the production structures of the firms concerned TNC subsidiaries and to their marketing these should be evaluated on the basis of how closely they match the prevalent disease patterns in a products by using similar marketing techniques (see y&u. nr~.,in,.~ re,-tin”\ ‘-0 Ar the nmnh-ck nf hnth n.rt;rlIllr mrlntr.r nptliiprl nprinrlir ;nfnrmntir\n n”..U Y”“U”.‘,. yu’“‘u’u’ W”U”L’J. YICII.IUY tm.‘““LC II~L”II,.LLL,“,, &.lb rs,ny’,U”L” “L ““LA, groups of firms has been on curative health care, regarding the disease patterns in Third World the similarity of approach to product choice countries is, however, seldom available, because, would indeed be expected.*’ apart from major parasitic and infectious diseases However, given the overall similarity in proand disease-related fatalities which are required ducts, there may be considerable differences in to be reported to the authorities by law, informaand tion about most other illnesses generally goes relative emphasis over the production marketing of particular groups of drugs between unreported. 25Usually the only clue regarding the the firms of different nationalities, and this may relative importance of unreported diseases is the provide a basis to evaluate the appropriateness structure of drug consumption by different theraaspect, the components of detailing activity may indeed vary by nationality, and this may have different implications for ca;pital accumulation at the local level in general. In sum, all the above evidence clearly indicates that many of the “inappropriate” marketing practices which have mostly been attributed to pharmaceutical TNCs are also widely practiced by the locally-owned firms in the Turkish pharmaceutical industry; and in fact, in many of these areas, local drug firms have outperformed their transnational rivals.

512

WORLD

DEVELOPMENT

Table 3. Dislribution of sales and totalproducts by therapeutic group Local Therapeutic

group

Own

analysis

of IMS (1983,

TNCs

Share of sales (Y0)

Number of products

Share of sales (%)

73 94 33 43 23 29 38 12 34 24

43.2 16.4 6.2 6.1 6.1 5.8 3.8 3.7 3.4 2.9

19 42 23 54 2x 8 I7 4 36 8

16.6 27.9 7.4 16.4 8.3 0.7 4.2 1.7 10.2 4.0

Systemic anti-infectives Stomotologicals and vitamins Respiratory system drugs CNS GlJ system and sex hormones Blood and blood forming organs Dermatologicals Systemic hormones Cardiovascular system Anti-rheumatics Source:

firms

Number of products

1st QTS)

data.

argument. To this end, chi-squares distribution was used to test the null hypothesis that no differences between foreign and local firms exist regarding their emphasis in different therapeutic fields. The null hypothesis was rejected at 5% level or better, as the nationality of ownership did seem to make for significant differences in concentration in particular therapeutic areas (x2 = 50.35). These differences given, the product structures of each group of firms were compared with the prevalent disease patterns in the country as indicated by (i) the overall drug consumption pattern2’ and (ii) the disease-related fatalities in 1982. When each of these rankings was correlated with the ranking of the drug sales of each group of firms by therapeutic categories, the following results were obtained. In the first case, that is the relationship between the overall drug consumption pattern and the firms’ drug sales, the Spearman rank correlation coefficients were r = + 0.950 for TNC subsidiaries, and r = + 0.833 for the locally-owned firms. This indicated that, while there was a positive correlation between each group of firms’ product structure and the overall consumption pattern in the country, TNC subsidiaries had a better correlation with the overall consumption pattern than the locally-owned firms. It cannot, however, be concluded on the basis of this finding that the TNCs’ drugs were more appropriate than the locally-owned firms’. Nor can it be concluded that all leading firms were producing appropriate drugs in Turkey. This is because, since these firms in fact account for a

larger share of total drug sales in the country, the overall consumption pattern necessarily bears the characteristics of the production structure of these firms. As a second measure, therefore, firms’ product structures (in terms of their ranking by their sales in different therapeutic groups) were compared with the major disease related causes of death, as of 1982. These are shown in Table 4. On the basis of these five major causes of death, Spearman rank correlation coefficients for both the TNC subsidiaries and local firms were calculated. Results indicated that the product structures of both groups of firms were negatively correlated with the pattern of fatal diseases encountered in the country. While the negative correlation between local firms’ product structure and the disease patterns (r = -0.80) seems to be somewhat stronger than that of the TNCs’ (r = -0.70), however, the difference did not appear to be significant. Had the data in Table 4 also incorporated information about nonfatal disease patterns in the country, a comparison of the appropriateness of each group of firms’ products would have been far more sound. Nevertheless, as the diseases shown account for around two-thirds of total drug consumption in the country, the results are still illustrative. Thus, on the basis of these findings, there appears to be no significant difference between the TNCs and local pharmaceutical firms in terms of the “ appropriateness” of the products that they produce and market; both the TNCs and the comparable local drug firms seem to rely more

TNCs AND LOCAL CAPITAL

IN THE TURKISH

PHARMACEUTICAL

INDUSTRY

513

Table 4. Major disease-related causes of death in Turkey, and pharmaceutical sales by the leading local and foreign firms in these therapeutic categories, 1982

Pharmacy sales, 198U3* Local TNC $ $

Diseases 1, 2. 3. 4. 5.

Cardiovascular Neoplasms Respiratory system Infectious diseases Digestive system + vitamins (alimentary tract and metabolism)

3,764 339 7,563 51,393 19,642 r’ = -0.80

11,239 2,913 8,139 18,319 30,861 r’ = -0.70

Total deaths

Share of total consumption W)

48,623 11,372 8,381 6,973 3,038

6.78 0.31 6.26 26.83 23.48 63.66

Source: Sales figures calculated from IMS (1983, 1st QTS); disease figures are compiled from DIE (1983, Table 64); overall drug consumption figures are from TPMA (1984, Table 10). Notes: (*) in $000; only cycostatics are taken for neoplasms.

heavily on the production and marketing of those drugs which are inappropriate with respect to major diseases.

(d) Appropriate

prices

Considering the Turkish drug-pricing legislation which, until recently, outlawed price differences between the products of similar generic identity,29 it would be futile to compare the prices of foreign and local firms’ products in any period up to the present. However, if it can be shown that both groups of firms were equally involved in overpricing practices, then, it can be concluded that, even though the pricing legislation regulated the uniformity in the prices of similar products, at that price level both the products of TNCs and local firms were higher than the arm’s_length world prices would have indicated. To this end, five products marketed by locallyowned firms which were revealed to be involved in overpricing practices were compared with a further eight products marketed domestically by the TNC subsidiaries which were also found to be overpriced. 30 It was found that the average rate of overpricing for the products of locally-owned firms was 372%, whereas that of TNC subsidiaries was 559%. The figures point to one fundamental factor: even though there was some difference in the rate of overpricing, which was largely due to the relatively small sample of overpriced drugs,31 both groups of firms were substantially involved in overpricing their imported active ingredients. Hence, the prices of local firms as well as those of TNCs were both overcharged, and they were equally inappropriate. In fact, since (under

government regulation of prices where the prices were based on costs), until1 last year, all drug firms were motivated to inflate their declared costs, it was generally the highest quotation which became the common basis for price determination. When this quotation, made for example by a TNC subsidiary, involved a margin of overpricing, all other firms which produced similar drugs would (and they in fact did) follow suit by declaring identical costs of active ingredients. As a result, in reality, many of the

products of local drug firms were overcharged by margins exactly equal to those of TNC subsidiaries. In addition to its contribution to increasing the manufacturers’ gross profit margins, there was a further factor which motivated the locally-owned drug firms, and especially the licensees, to inflate the declared costs of their imported raw materials. Through this method, importing firms could arrange for the invoicing of raw materials by the suppliers above the actual transaction prices between these two parties so that additional foreign exchange could be secured from the Ministry of Health and deposited abroad for use in periods of foreign exchange shortages. In particular the licensing agreements, as reported in the OECD survey of the pharmaceutical industry, “have at times been used to overcome foreign exchange controls, licensees having transferred funds abroad by agreeing to pay higher prices for raw materials” (OECD, 1975, p. 69). In sum, largely as a consequence of the pricing regulation of the Ministry of Health which determined the gross manufacturers’ profits, all drug firms, local and foreign alike, had strong incentives to inflate the costs of their imported active ingredients, and in those cases where overinvoicing was involved, both locally-owned

514

WORLD

DEVELOPMENT

firms and the TNC subsidiaries equally overcharged the patients in Turkey. In 1984, however, government control over drug prices was relaxed (see Note 29). This provides a basis for comparing TNC vs local firm products under the new liberal pharmaceuticals pricing system. To this end, generically identical products with same dosage forms, and same quantities, produced by TNC subsidiaries and locally-owned drug firms were identified, and 32 products of 10 different generic identities, satisfying all three conditions were isolated. Table 5

shows the prices of these products. The table indicates that, in four generic groups, prices of TNCs products were higher than those of local firms, and in another four, it was the local firms’ drugs which had higher prices. In the remaining two generic groups, on the other hand, both TNC and local firm drugs were charged by equal amounts. The data in Table 5, therefore, indicate that, neither the TNCs nor the local firms have consistently charged higher prices in comparison with each other.

Table 5. Price comparisons between thegenerically identical drugs of local andforeignfirms,

Drugs

(generic/brand)

Trimethoprim

Manufacturer

L/TNC

Quantity

Price

20 May 1985 Average Local

price TNC

comb.

Bactrim Sulfatrim Baktron

Roche Dogu lltas

TNC L L

Bactrim Baktrisid

Forte DS

Roche Fako

TNC L

Bactrim Baktron

Susp. Susp.

Roche fltas

TNC L

980 TL 407 195 1342 1372 100 ml 100 ml

480 550 781

934

292.8

286.6

200

480

110

110

270

385

Vitamin BI complex Becozyme Vitexir

Roche Yeni

TNC L

210 TL 310

Becozym C Forte Polivital-T Kombevit-C

Roche Eczacibasi Deva

TNC L L

390 297 300

Becozyme Amp. Bemix Kompoze

Roche Eczacibasi

TNC L

2 ml/5 2 ml/5

260 264

Mulfiviramins Supradyn Panvit

Ephedrine

Roche Deva

TNC L

480 TL 200

Chlorhydrate

Ephedrin Efedrin Arsan

Merck H. Arsan

TNC L

20 tab. 20 tab.

110 TL 110

Frusemid Lasix Desal

Hoechst Biofarma

TNC L

2 ccl5 amp. 2 ccl5 amp.

385 TL 270

Aceryl Salysylic Acid

Asprin Asabrin

Bayer Drifen

TNC L

20 tab. 20 tab.

86 TL 160 160

86 (continued)

TNCs

AND

LOCAL

CAPITAL

IN THE

TURKISH

PHARMACEUTICAL

INDUSTRY

515

Table 5. Price comparisons between the generically identical drugs of local and foreign firms, 20 May 1985

Drugs

(generic/brand)

Manufacturer

UTNC

Quantity

Price

TNC L

30 tab. 30 cap.

260 TL 255

Average Local

price TNC

Nifedipine

Adalat Nidilat

Bayer Dogu

25s

260

Niclosamide

Yomesan tab. Tenisid tab.

TNC L

Bayer Liba

0.5 g x 4 0.5 g x 4

95 TL 95

95

95

Methylergobasine

Methergin damla Metiler damla

Sandoz Adeka

TNC L

Methergin Draje Metiler Draje

Sandoz

TNC L

Adeka

10 ml 10 ml

251 TL 340 330 324 332

290.5

Oestradiolbenzoate

Cumorit Forte amp. Ostroluton Forte amp.

Schering Ibrahim

AC Etem

TNC L

1 ml 1 ml

85 TL I25 I25 General

Source: The author. Notes: Each grouping the drug is marketed

(e)

averages

363.2

85 __-382.9

indicates same generic identity, same dosage form, and same quantity. “L” indicates that by a foreign subsidiary firm. by a local firm, “TNC” indicates that it is marketed

Exportperformances

Compared to its rate of growth over the past two decades, the export performance of the Turkish pharmaceutical industry has been very poor. In 1979, a mere 0.3% of total production was exported, and pharmaceutical exports accounted for only 0.3% of total industrial exports3* Even though the share of the pharmaceutical industry has been minimal within the overall manufactured exports of Turkey, it is still important to see the main agents which are responsible for whatever exports that the industry has generated, so as to evaluate the relative performance of TNCs and local firms. For the first 10 months of 1982, the total finished and raw materials exports of the Turkish pharmaceutical industry were valued at US $14.328 million. Of this total, $2.787 million worth of exports was accounted for by all TNC subsidiaries in the country, and $11.541 million by the locally-owned drug firms (FFYDPIOIKR,

1983b, p. 15). Hence, by accounting for 80.55% of total pharmaceutical exports, locally-owned drug firms performed substantially better than the TNC subsidiaries whose share of exports was only 19.45% in 1982. The available figures for 1983 indicate similar trends. Table 6 shows the values of exports for seven (all) TNC subsidiaries and for seven matching (in terms of size) locally-owned firms. Also shown in the table are the average export/ sales ratios which indicate the extent of internalmarket orientation of the firms concerned. Total exports realized by the exporting firms in the above sample were $11.242 million, while the total industry exports for 1983 were valued at $12.851 million. Thus, exporting firms in the sample accounted for around 88% of total industry exports in 1983. Not all the firms which are included in Table 6 were involved in exporting and nearly all of TNC exports were accounted for by three firms only. Among the seven leading local firms, on the

516

WORLD

DEVELOPMENT

Table 6. Exports of TNCs and local drugfirms Number

TNC subsidiaries Local firms Totals

7 7 14

Total exports

1,249,321 9,992,764 11,242.085

Source: IS0 (1984); B.I. (1984); correspondence other hand, five were involved in exportation. However, each of these firms exported substantially more than the TNC subsidiaries. In fact, the value of exports of every single exporting local firm (except one) in our sample was larger than the combined value of exports of all TNC subsidiaries in the period concerned. Consequently, local drug firms’ share of total exports was considerably higher than that of TNCs whereby the latter accounted for only 11 .ll% of total pharmaceutical exports as against the former’s share of 88.89%. As for the export-to-sales ratios, the averages (which also include the nonexporting firms) indicate also the higher export propensity of locally-owned firms. Thus, while the exporting TNCs’ export-sales ratios varied between 0.003% and 4.6% with an overall average of 1.37%, those of the exporting local firms varied between 0.5% and 22.2%, with an overall average of 6.4%. These figures indicate quite clearly that TNC subsidiaries in the Turkish pharmaceutical industry are predominantly oriented towards the internal market and, despite all the incentives provided by the state, they have failed to increase their exports beyond negligible levels despite the huge potential that their international trademarks possess in the export markets. Under the highly similar circumstances which characterize the pharmaceutical industry as a whole, however, locally-owned firms, although extremely limited in number, seem to have persistently outperformed their foreign counterparts.‘”

4. CONCLUSIONS This paper examined numerous issues in the debate over the comparative performances of TNCs and local firms on the basis of the evidence gathered in the Turkish pharmaceutical industry. Five main issues in the “appropriateness” debate have been examined: the appropriateness of (i) technologies, (ii) marketing practices, (iii) products, (iv) prices, and (v) the relative export performances of TNCs and local firms.

($)

Average

export/sales

ratios (I%)

1.367 6.397

with TPMA, and replies to questionnaire. It has been shown - bearing in mind the limitations imposed by the sample size in some of the analyses and, overall, by the microeconomic nature of the study - that, once the differences in size and scale of operations are controlled, no discernible difference between the nationality of ownership of firms and their capital intensity has been found. Similarly, and again after controlling for firm size, no differences could be found between local firms and TNCs in terms of the intensity of their detailing activity. Both local and foreign firms appeared to be following similar competitive strategies which are not very different from those which characterize the industry at the global level. In fact, and contrary to some observers, it has been shown that in some of those aspects, more specifically in terms of spurious product differentiation, local firms seem to have been more aggressive than TNCs in the Turkish pharmaceutical industry, especially by introducing more and more products, which were mainly duplicates of those compounds already known and existing in the local market. As regards the “appropriateness” of product prices, moreover, it has been shown that local firms are equally involved in overpricing activities. It was argued that, due to the existing pricing legislation, all firms in the industry were motivated to inflate their costs, and hence, final product prices; nevertheless the available evidence indicated that TNCs overpriced to a higher extent than local firms.34 However, the analysis of comparative product prices following the relaxation of government price controls over pharmaceuticals indicated that there was no consistent pattern of overcharging of final product prices by firms of different nationalities. In only two areas were significant differences found between TNCs and local drug firms. First, it appears that in terms of special emphasis in particular therapeutic areas, there is a discernible difference between the two groups of firms. However, despite these differences in special emphasis, comparison of the product structure of TNCs and that of local firms with the prevalent pattern of fatal diseases, as well as with the pattern of drug consumption by therapeutic

TNCs AND LOCAL CAPITAL

IN THE TURKISH

groups, indicates no significant difference between the two groups of firms in terms of the “appropriateness” of the products that they produce and market. Both the TNCs and the large comparable local drug firms similarly rely more heavily on the production of those drugs which do not provide cures for the major causes of mortality in the country. Second, however, as far as exports are concerned, local firms appear to have performed much better than the TNCs, which are still predominantly oriented towards the internal market in their operations, despite the inter-

PHARMACEUTICAL

INDUSTRY

517

national competitive strength of their trademarks. This cannot, however, attribute credit to local firms in any substantial way, because the export performance of the industry has generally been extremely poor. In conclusion, it is difficult to state that the dominance of local firms in the Turkish pharmaceutical industry has been beneficial, because all the negative aspects of pharmaceutical production and exchange which the critics have attributed solely to TNCs have been similarly reproduced by local firms in the pharmaceutical industry in Turkey.

NOTES 1. A notable exception is Chudnovsky’s (1979a) study on the Argentine pharmaceutical industry. 2. In 1981, locally-owned firms accounted for 60.39% of total pharmaceutical sales in Turkey. TNC subsidiaries’ share was 39.61% (communications with TPMA). 3. The use of the phrases “appropriate” prices and “appropriate” marketing is purely for semantic reasons; the relationships (balance/imbalance) between the existing income levels and final product prices and the extent/nature of the marketing activities have been referred to previously by others by using that phraseology (e.g., Gereffi, 1983, pp. 193 and 205). 4. Some of the studies which observed differences in the technology choice of TNCs and domestic firms are Wells (1973). Balasubramanvam (1973). Agarwal (1976), Leipzeiger (1976) and Solomon and Forsyth (1977); see Newfarmer and Boardman-Free (1985). La11(1980), and Kirkpatrick et al. (1984) for extensive surveys of this literature. 5. Some of the studies which found no discernible differences between the TNCs and domestic firms are Mason (1973), Riedel (1975), and Lall and Streeten (1977); see surveys cited in note 4. 6. For example, Melrose (1982); Muller (1982); Ledogar (1975); Gereffi (1983, p. 190), under the heading “The Appropriatenes of TNC Performance in the Third World.” 7. For an account of some adverse effects of taste transfer on the economies of Third World countries, see Langdon (1981), p. 48. 8. Transfer-pricing may involve under- as well as over-pricing. Here, we are concerned with the latter aspect only.

both the dollar value of Third World manufacturing exports continued to grow considerably, and the LDCs’ share of world markets for manufactures continued to increase (see World Bank, 1984, p. 26). 10. Cohen (1975); Lall and Streeten (1977); Jenkins (1979); Vaitsos (1978); Fajnzylber and MartinezTarrago (1976). 11. Jo (1976); Willmore (1976); indirectly Lall and Mohammed (1983). 12. Newfarmer and Marsh (1981, p. 107). See Lall and Mohammad (1983) for a methodological critique of some of these studies. 13. See Tucker (1984) pp. 44-49, and Figures 12, 13, 14; Gereffi (1983), pp. 17680, and Table 6.3; Information Research Limited (1980), pp. 35-36, and Table 21. 14. The following are the foreign pharmaceutical corporations which have subsidiarv operations in Turkey with over 60% equity participation: HoffmanLa Roche (Switzerland). Sandoz (Switzerland). CibaGeigy (Switzerland), Pfizer (USA), Wyeth ‘(USA), Hoechst (Germany), and Bayer, Merck AG, Schering AG, Knoll which formed a consortium, namelv BIFA which is short for “United German Pharmaceutical Factories Ltd.” (Birlesik Alman Ilac Fabrikalari A.S.). Up to 1976, four other foreign corporations had subsidiary operations in the country. These corporations, i.e., Abbott (USA), E. R. Squibb (USA), Farmitalia (Italy) and Carlo Erba (Italy), sold their establishments to Turkish firms in 1976, and withdrew from the market. 15. The questionnaire was designed to obtain data on pharmaceutical firms’ (i) technology choice, (ii) R & D intensity, (iii) import intensity of production, and (iv) export propensities. 16.

9. Even though the average annual rate of growth of manufacturing exports fell from their average level of 10.6% in 1973-80, to 6.9% between 1980 and 1983,

Quoted in Kirkpatrick et al. (1984), p. 107.

17. See, for these, UNCTC (1979); Lall (1980, pp. 161-215); Heller (1977); Measday (1971).

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18. The direction of causation runs from large-firm size to more products, rather than the opposite. This is due to the magnitude of the necessary promotional expenses. To achieve success in therapeutic markets, new product introductions must be backed up by heavy advertising (see Slatter, 1977, p. 82). The extent of the required promotional outlays prevents smaller firms introducing a stream of new products, but enables the large firms to pursue this type of competition (for an illustration of the magnitudes of promotional expenses in the Turkish pharmaceutical industry, see Kirim, 1985a, p. 224, Table 3). 19. Most leading pharmaceutical companies are known to depend heavily on a very limited number of specialized therapeutic areas for the majority of their drug sales (Schwartzman, 1976, pp. 119-123). This is despite the distribution by many large manufacturers of their R & D efforts among many therapeutic areas as a measure to diversify risk (ibid.). 20. In the IMS data, therapeutic submarkets. 21. In some cases, their own products.

the market

is divided

25. One source of information about the aggregate disease patterns in a country can be the research work carried out by universities and other health care institutions. This type of information, however, is not always continuous, and not available in all Third World countries. 26.

manufacturers

into 87

23. There is some evidence which suggests that TNC subsidiaries tend to distribute more free drug samples in their promotional campaigns than locally-owned firms. They also give away more free gifts. It was argued elsewhere that the TNCs’ tendency to distribute more free samples in Turkey is related to their objective of maximizing the “quantities” of the raw materials that they import from their affiliated firms (each sample drug adds to the total raw material imports by the TNC). This way, it was argued, scope for transfer-pricing could be increased by manipulating the “quantities” of imported intermediaries, and local corporate and income taxes could be avoided (see Kirim, 1985b, Chap 6 and Appendix 6.IV, pp. 467470). of tropical but hardly

On the basis of the information 38-29.

in TPMA

(1981),

replicated

22. A possible explanation for this tendency may be the claim, which was made several times during our interviews in Turkey that, TNC subsidiaries, whenever they could not avert government pressures to reduce the prices of some of their overpriced active ingredients, withdrew these products from the Turkish market. Instead, it is claimed, they replaced these products by “new” drugs of similar therapeutic effects as the suspended ones, but using different active ingredients. This way, it is argued, they could not only maintain leading positions in key therapeutic markets, but also continue their transfer-pricing practices. On the first of these two claims, i.e., that TNC subsidiaries tend to suspend their overpriced drugs when they could not avert government pressures, considerable evidence could be found. As for the second claim, however, the evidence gathered is rather scanty (see Kirim, 1985b, Chap. 9 for evidence and elaboration).

24. Such as the appropriateness which are vital for many LDCs, non-tropical areas.

(1977).

27. Curative approach to health care is based on treatment by using medicines with regular access to medical practitioners. Preventive health care, which seems to be the most efficient health policy for many Third World countries, on the contrary, would require emphasis on better nutrition, adequate and safe water supplies, and improved sanitation. It would thus need to eradicate the causes of major diseases, rather than curing these diseases by using drugs. However, recent advances in medical research also point to a move towards research into preventive drugs (see Tucker, 1984, pp. 2&23). 28. pp.

these

See O’Brien

medicines needed in

29. According to Decree No. 7/4729 of 29 March 1972, the authority to determine the prices of pharmaceutical products is the Ministry of Health (MoH). The MoH specifies product prices on the basis of raw and auxiliary materials, labor costs, indirect expenses, and packaging costs. Around 60% of total production costs is accounted for by raw and auxiliary materials. On the calculated cost of drug products, a certain profit margin (25%) for manufacturers and for pharmacists are added to arrive at the final price of the products. The higher the declared costs, therefore, the higher are manufacturers’ profit margins. As the government usually has control over the costs of labor, indirect expenses and packaging material, inflating costs has to take place in imported raw materials. For each active ingredients product, there is only one import price, which is determined on the basis of the lowest attainable quotation. This price, once approved by the MoH, is published periodically in a price index. These “index” prices are the prices which form the basis for price calculations of all drugs which use similar active ingredients. If one manufacturer overquotes its active ingredient import price, then every other similar drug’s active ingredient will be overcharged by an equal margin. Retail prices of identical drugs, according to the legislation, cannot be different. This decree was annulled on 28 December 1984, and replaced by a new decree, No. 84/8845, which no longer requires the uniformity of final prices of similar products. According to Decree 84/8845, firms can individually determine their final product prices, subject to government approval. This, in effect, means the abolition of government control of drug prices. 30. Based on the information gathered by the author; see Kirim (1985a). 225; (1985b), Chaps. 4 and 9. 31. Due to enormous difficulties in overpricing practices, the number of products had to be rather restricted.

detecting analyzed

TNCs AND LOCAL CAPITAL

IN THE TURKISH

32. Calculated from Annual Foreign Trade Statistics, 1979, State Institute of Statistics, Ankara. 33. In 1976, the Ministry of Commerce undertook a survey of 146 foreign-capital firms operating in Turkey. This survey revealed, across industries, that the export performance of the locally-owned firms was superior to that of foreign-capital firms. The share of foreign firms in total exports of the manufacturing branches that they

PHARMACEUTICAL

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519

operated in was quite low (7.13%) (see Alpar, 1980, p. 228, Table 64). Similarly, the export-to-sales ratios of foreign-capital firms were also very low across industries (see Uras, 1979, p. 214, Table 29). 34. It must again be noted that the lack of a sufficiently large number of observations on overpricing activities might have been a factor affecting this finding.

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