An international political economic view of the biotechnology industry

Ian Edward Pownall*
University of Hull
Scarborough Campus
Scarborough Centre for Business and Leisure Managment
Filey Road, Scarborough
North Yorkshire, England
YO11 3AZ
Tel. 01723 362392 Ext 262 Fax. 01723 370815
E-mail: ianp@ucscarb.ac.uk

* Corresponding author

This paper uses a model developed from the international political economy (IPE) school, to address the structure of the biotechnology industry. In particular, by focusing upon four primary structural elements of the industry, knowledge, production, finance and security with key secondary considerations of biosafety, public opinion and choice of intellectual property regime, the development of biotechnology companies from developed countries fits within a triad dominated industry with specific interests towards firms from developing countries. The activities of a sample of US National Association of Securities Dealers Stock Market (NASDAQ) quoted biotechnology firms are investigated to support the model which concludes by the observation of the need to include both strategic and traditionally non strategic interests when reviewing policy formulation and objectives for firms in the biotechnology industry.

An attractive industry?

A review of the US Biotechnology company performance identifies that the sector is prone to spectacular failures and crashes as investors began to question the logic of assured high returns. In 1994 for example, US company Synergen lost $715m of its market value in a single day when its Antril drug failed in clinical trials (Welles, 1999). Indicative of recent UK difficulties in this sector, shares of the small biotech diagnostics firm Shield Diagnostics have ranged from a low of 103 pence to a high of 919 pence (Newsedge, 1999c). More recently, increased merger activity between the large firms and a squeezing out of the medium sized biotechnological company is apparentⁱ with deals such as Monsanto's purchase of Dekald Genetics for $2.3b which was swiftly followed by Du Pont's buy out of Pioneer Hi-Bred International Inc for $7.7b (Holland, 1999; Kupper, 1999; Morgan, 1999; Newsedge, 1999b) and of course the previously aborted merger between Glaxo and SmithKline-Beecham. Acceptance of long lead times, decreasing investor funds (and confidence), rationalization, problems of intellectual property, healthcare policies and structural economic difficulties are rapidly maturing the biotechnology industry.

Despite these apparent problems, European biotechnology firms and policy makers have reason for cautious optimism. Compared with the IT sector, the dispersion of regional biotechnological strengths is considerably wider than was the case with that sector in the early 1980s. Europe has strong traditional biotechnological activities in fermentation, enzyme production, agriculture, food processing and pharmaceuticals which endowed the large European transnationals with a significant initial competitive advantage. A dependence on these initial resources though is, as the resource based theory of the firm stresses, of limited long term benefit (Christensen, 1996; Foss and Knudsen, 1996; Spender, 1996; Zucker and Darby, 1998). In a sector where knowledge (especially new to the world knowledge) is perceived to be the primary source of competitiveness, a static or introverted / regional market perspective means advantages are quickly lost.

An overview of an international political economy perspective

Stopford et al. (1991) developed a diplomacy model, which views industrial sector development as a result of the relationships between the triangle of interpenetrating actors from the state, the market and the firm. Lawton (1997) extended this analysis for the EU environment, by considering the role of meta and supra levels of state involvement. Importantly, this methodology allows account to be made of historically endowed and policy constructed competitive advantages. Overall by considering the interaction between different governance levels in this market sector, the evolution and capacity of those actors to shape the development of the market can be gauged. This is known as structural power and unlike the more realist driven relational power, it is the capacity of an actor / set of actors to shape and influence the development of that market sector. This can be initially achieved intentionally or by historical happenstance and in this paper, the combinations of finance, knowledge, security and production, as key factors underpinning the development of this structural power are examined in the biotechnology sector (Strange, 1988).

In particular, as both Cerny (1996) and Peterson (1994) argue with the competitive state concept, the co-ordination of national support systems for industrial sectors, through the four factors given above, determines the capacity of the nation-state to support industries and hence to a certain extent, the scope those national industries and firms have for shaping the development of that global industry. Sklair (1998) adopts a more focused firm view, where an industrial sector (especially those which are globally focused), develops through four pillars of activity, yet these four pillars are themselves derived from different actor relationships of the four structural power factors. These four pillars are:

• The extent of Foreign Direct Investment (FDI)
• Industrial practises sourced from a global arena (such as benchmarking and world best practise).
• The degree to which the firms promote a global corporate citizenship in their business practises.
• The extent to which a global vision guides business activities, opportunities and profit

Clearly, FDI is a direct component of structural power for the actors concerned, with the ability to release or with-hold capital a key consideration in an industry with long lead time and high capital demands. Industrial practises are also derived from production knowledge (a structural power factor), an issue which Kogut and Zander (1993) argue is critical for sustaining a firm's competitive advantage. Notably, these last two activities, are internal to the firm.

This cursory review of IPE concepts therefore suggests that effective biotechnology firms will derive their competitive strengths and capacity to shape industrial development through a mix of knowledge, production, finance and security factors which shape and are themselves shaped by the internal organisation and activities of the transnational. Individual firms do not possess power, but are part of the system of relationships which fixes the development of the sector to certain resources and practises of the firm which may have more experience or access. One manifestation of this external - internal structural power fixing, is arguably found in market activities including collaborative alliances, mergers and acquisitions and specific institutional arrangements that underpin the competitive state concept.

Deriving from the four primary sources of structural power in the biotechnology sector, are secondary influences (Strange, 1988). These secondary influences are particularly important for some regional markets (such as the UK or Germany), although less so for others (such as the US or Italy). Three key secondary issues are the public perception of biotechnology, the most relevant intellectual property regime to implement and emergent biosafety protocols for the handling, manipulation and distribution of biotechnology products. Actors unable to effectively address these secondary concerns, can see their capacity to effect market changes and power, curtailed.

International political economy and the nature of technological competitiveness

The IPE frameworks presented by Stopford et al. (1991), Wyatt-Walter (1995) and Lawton (1997) encompass the nature of contemporary business-governance inter-relationships. Stopford et al.'s (1991) original triangular diplomacy model was updated by the pentagonal model presented in Lawton's (1997) analysis of EU Semiconductors policy. This model has value in that it readily identifies the major communicational and policy-making possibilities that are implicit in the broader firm-governance interface. Given differing international business sectors however, the single sectoral focus of Lawton's (1997) framework must be broadened to acknowledge that although a useful heuristic tool sectorally, the interaction between actors can be expected to vary widely for less developed policy streams such as biotechnology, reflecting existing policy competencies and success at the regional, national and European governance levels. Cantley (1999) for example stresses the nature of policy convergence when discussing biotechnology industry, with the EU Directives on contained use of genetically modified organisms (90/219) and the field release of genetically modified organisms (90/220), the context of the Convention on Biological Diversity (1993) and the proposed Biosafety Protocol (Commandeur et al. 1996) which are linked to the discussions of the WTO over the most relevant intellectual property regime to implement in developing countries (Commandeur,1996) and the Sanitary and Phytosanitary agreement (SPS). It can also be argued that Sklair's (1998) FDI firm focus will affect the relevance of the different levels of analysis presented by the model.

It is the relationship between large international businesses, nation state actors and the European Commission (via the relevant Directorate-Generales) that are the key focus to policy development and priority setting in the EU (Wyatt-Walter, 1995 ; Lawton, 1997). To this observation however should be added the significant variation in the different technological policy streams in terms of relevant actor capacities, at least partially shaped by secondary factors. This in particular identifies the bioentrepreneur as an increasing focus of such support policies (DG XIII, 1997; Adam, 1997; Nature Biotechnology, 1998; Nature Biotechnology, 1999) and the nature of the supportive environment within which they exist. A hostile environment may result in firms leaving a region in favour of one with less regulations (EFB and EMBO, 1999), threatening expected welfare benefits, just as policy making generally is seeking to associate technological, competitive and cohesive issues.

Political integrational constraints arising from the need for multiple nation-state policy support are important policy boundary factors in the EU (Lawton, 1997). The transition of technological, competition and cohesive issues out of the traditionally limited industrial policy of the EEC to more specific formal and codified industrial policy competencies within the EU, remains limited. Rather, the EU industrial arena still operates with a more functional, incremental and co-ordinational rationale, resulting in policy convergence and the emergence of multidimensional policies (Holland, 1993; Charles, 1995; Adam, 1997)ⁱⁱ. Member-state policies remain important national arenas for shaping national industrial competitiveness in a melée of different locational and resource conditions. Only very recently with the 1998 European Biotechnology Patent Directive, has pan EU protection and support been available.

This observation embraces the notion that the home base of the firm remains the core source of its competitive advantage (Ring et al. 1990; Dunning and Cantwell, 1991; Patel, 1997). It can be expected therefore that such firms would be more likely to maintain their key assets and resources in their home country rather than a host nation-state (although there may be some variations for global industries depending upon the internal geocentric orientation of the firm) (Ring et al. 1990; Dalton and Serapio, 1995ⁱⁱⁱ; Wyatt-Walter, 1995; NSF - Science and Engineering Indicators, 1996). As such, national competitive advantage can be largely maintained within 'nationally' controlled factors (Mitchell, 1997a). Importantly, in the biotechnology sector, nationally controlled factors can be further ensured through the relationships nurtured between developed biotechnology countries and those developing competences in biotechnology. Headlining this concern is the TRIPs (Trade Related Intellectual Property) agreement and the development of (indigenous) developing country patent protection systems (Seiler, 1998).

Overall, this is the familiar argument of Peterson (1994) and Cerny's (1996) competitive state. For example, US international firms in the high technology industries, continue to perform approximately ninety per cent of their basic research within the US (Dalton and Serapio, 1995). A review of the preferred collaborative partners (a key competitive tool in the biotechnology sector) of a random sample of NASDAQ quoted biotechnological companies, continues to stress the importance of US partners, especially for research and development activities (Table 1).

From Table 1, the dominance of US with US and European strategic partnering is clear. Moreover, it is firmly focused in research and development. Collaborations with Japan based biotechnology firms favour local marketing and production determined by market access constraints, although Japanese firms generally have stepped up their overseas business activities since the collapse of Japan's bubble economy (1991) particularly in Asia (STA, 1998). This was further aided by the relaxation of foreign ownership restrictions in Asian countries for both investment and research programme participation (BioAsia Monitor, 1998; STA, 1998). These findings also reflect the views in the comprehensive report by the National Science Foundation (1996) where Figure 1 highlights differences between the absolute number of biotechnology strategic alliances established (by firm home country) between 1980 and 1994. The preference for EU - US tie ups is again clear. Figure 2 repeats this pattern when all enabling technology strategic alliances are considered. In that figure, the number of alliances of US to EU and Japanese firms whilst increasing over the period 1980-1994, is accelerating far slower than between US and US firms.

The data in Figure 3 according to Lawton (1997) would indicate the location of structural power in the industry through both resource location and access to dominant practises. With supporting evidence for the validity of the general trends for the NASDAQ sample seen in Table 1, a key observation is that none of the sampled firms currently undertook strategic partnering for research and development (nor licensing of their technologies) from or to firms not residing in either the US, Japan or the EU. This remained strictly a Triad activity. In the broad sense therefore, regions, nation states and regional groupings of nation-states able to facilitate advantageous competitive conditions and factors to enterprises within their borders through the interfaces and factors described improve the prospect of developing and shaping structural and relational power attributes in global technological markets. By focusing upon policy and strategy priorities, the scope of national actors to build regional competitive advantages in the biotechnology sector can be gauged.

Structural factor fit

The IPE perspective offers an effective way of recognising the potential 'fit' of the biotechnological sector to a regional / national / international economic system. This moves an analysis away from a Porter style orthodox interpretation of the business environment where such methodologies view each 'level' in the system atomistically as a distinct node of operation for the actors that shape competitiveness. Thus economic policy becomes composed of a fiscal and monetary policy and business policy is both productive and corporate strategy policy derived. Whilst such an approach has value, it can nevertheless omit or fail to recognise some of the important global influences in technological sectors through which these levels merge and become rooted to other process transformations in society. This is especially important for issues of public perception, information availability, scientific trust, product labelling and safety. The development of new growth theory with its link to the systemic integration of innovation factors for endowing regions with total factor productivity, is just one outcome of this approach (Deleuze, 1988; Elliot, 1996; Metcalfe, 1998; APEC, 1998).

The importance of looking beyond the traditional Porter business environment factors, to a more systemic perspective, that encompasses both primary (structural and relational) and secondary power factors, is highlighted by Daza (1998) for example, in a review of the United Nations University (UNU) / BIOLAC initiative in Latin America. This identified gender and ideology as important issues shaping regional activity in biotechnological programmes. Similarly, DaSilva and Taylor (1998) outline a series of socio-political factors that shape the effectiveness of biotechnological development programmes in the Caribbean and other Developing Countries (DCs). Furthermore, both the NSF (1998a) and MITI (1998) review of current (1997) Japanese R & D policy has identified that key cultural changes are needed in perceptions of work and values maintained by that society in order to sustain its present competitive positioning across the technological industries (Dorebjee et al. 1998)^iv. Rothenberg and Macer (1995) for example highlights evidence of the public perceptions of the first marketed biotechnology products in the US (Monsanto's recombinant bovine growth hormone (rbST) and Calgene's Flavr Svar tomato), which highlighted marked differences between stated behaviour and actual buying behaviour when purchasing these products.

Such issues tend to be sidelined in academic mainstream strategy literature and indeed in biotechnology firm market operations (Commandeur et al. 1996). Whilst for example, the links between globalisation and firm / nation-state economic performance are aptly explored by Archibugi and Michie (1997), the authors fail to mention the development of the interaction between regions, nation-states and regional groupings of nation-states from an explicit power perspective. The development of an EU Biosafety Regulation has been problematic because of different national perceptions of the nature of risk in the first instance. Secondly, secondary effects arising from biotechnological products interacting with the environment are not considered as relevant for decision making in the formulation of such a regulation.

Yet, this is an issue which has long been a component in debates over Europe's technological and competitive position vis-a-vis US and Japanese rivals (Wyatt-Walter, 1995) and which is argued here, is fundamental to the comparative performances of such firms. In essence, the conflict between national technology policy and firms in industries that are highly internationalized and in some cases globalized, is a frequent point of political discussion. Yet despite obvious policy overtones of recurrent attempts to manipulate this environment to the advancement of national economies, a firm based analysis remains primarily driven by economic viability and political legitimacy rather than by a consideration of the operation of power in such policies or through such technologies and practises. This results in oversights and arrogance in terms of what is acceptable to those markets.

Knowledge is key to our understanding of the potential for any policy to promote and sustain firm competitiveness, as well as the manner of its integration into policy development (Campanella, 1995; Metcalfe, 1998). There may therefore be a better 'fit' between the demands of the biotechnology industry and its ready acceptance for certain societies than others. This 'fit' arguably begins with those historically accumulated biotechnological resources and for which the European states possessed an early advantage. It may also be driven by societal concerns, such as an ageing population, particular predominant diseases and regional and geographical needs of food shortages, that by accident rather than design, engender the accumulation and development of certain knowledge bases and skills to a given territory.

Examples of this fit and duality of purpose for biotechnology activities, can be found with the EU's Pacific Regional Agricultural Programme (PRAP) which serves both competence development in the Pacific region as well as strategic policy objectives of the EU (Case 1). A further example would be the reciprocity role and function of USAID in biotechnological activities (NSTC, 1999) and the shape and development of EU programmes to ACP and CEE states (Case 2). With shortening product lifetimes, developing countries (DC) markets become increasingly attractive as they are under served domestically (Powell and Pearson, 1995) such as the International Development Research Centre of Canada's (IRDC) development of the CamBioTec initiative (Verastegui, 1999). Finally, the emulation of EU Directives on the containment and use of genetically modified organisms and patent protection systems in the Central and East European States (CEES), through combinations of trade and international organisation pressures, further change the shape of those markets to be more receptive and enforceable under preferred developed country parameters (EFB, 1999).

Case 1

Operational since 1990, this programme comprises a number of projects based in the eight ACP countries of the Lomé convention. The Caribbean countries had, through UNESCO's Microbial Resources Centre (MIRCEN) network, the Caribbean Development Bank, the Latin American Energy Organization (OLADE), South Pacific Commission's (SPC) plant protection service and the development of a regional strategy devised in 1988^v, recognised traditional strengths in microbial biotechnological practises including:

• Biodigester designs

• Fermentation

• Bioremediation

• Tissue Culture

These are key issues being developed by the PRAP programme (currently in Phase II)^vi. Phase I sought to increase the regional facilities and capacities (infrastructural concerns) whilst the current focus is upon developing national capabilities, ostensibly via training and education. Tissue culturing has been identified within the global biotechnology sector as a prime focus for its continued development in Japan (STA, 1997), India, The Philippines and Australia (BioAsia Monitor, 1998). Maintaining access to such potentially crucial knowledge is arguably a major consequence of this initiative for EU firms. Furthermore, both Vietnam, the Philippines and China are engaged in funding and despatching scientists to projects initially operated by PRAP solely for regional institutions.

Daza (1998) also notes that apart from EU sponsoring interests in programmes like PRAP with potentially structural intentions and other party interest as noted previously, a third source of relational power has emerged in such areas which possess considerable biodiversity, yet are just gaining the skills to be able to utilize and protect this natural regional heritage. He describes this as a wider regional interest, or a South-South development. Whilst the UN originally created the BIOLAC programme for Biotechnological Development in Latin America (narrowly geographically defined), both Canada and Peru have become involved in the initiative (and contributed funding), with the intent on gaining knowledge from the programme's three main objectives: diagnostics, vaccines, plant genetics and microorganisms of industrial interest. Nevertheless, their review of the origins of participants and the results of the programme support a primarily regional perspective, with South-South networks of collaboration and information exchange dominating. Links with the developed countries, such as the USA are maintained but not intensively.

Case 2

The Commission communication on industrial policy in 1994 (COM (94) 319 Final) is informative of the development of intentional and unintentional industrial structural power. For example, extensive reference is made to building and developing increased economic ties with the ACP (African Caribbean Pacific States) and CEE (Central East European) states. Indeed in the CEE states, pressure has already been exerted upon the cheaper manufacturers in those countries to limit production so as to not unduly affect the prevailing economic situation with the EU. The lever for this has been future industrial co-operation and the transfer of technology including biotechnology^vii. The focus of ACP and CEE states for EU industrial policy measures is primarily driven by the emergence of growing markets that can be effectively captured by EU and European producers and be guided to use European standards, where control of the IPR has been recognised as an important aspect in shaping the knowledge structure (see for example, APEC, 1998)^viii. In those markets where European industries face strong competitive forces that can affect both employment and production levels, political intervention has been frequently employed on a bilateral basis to safeguard the European position (in semiconductors and automobiles for example (Mason, 1994; Lawton, 1997). In other sectors, multilateral discussion has been used but often with only temporary results requiring episodic amendments (in the aeronautics, steel and audio-visual industries for example)^ix.

Continuing these themes of duality, the countries of Brazil, Chile and Argentina, which possess considerably sized markets, are making concerted efforts to increase their technological standing in the regional environment, sometimes in opposition to WTO/TRIPs preferred practises to protect indigenous resources (Seiler, 1998). Private sector funding in these countries, has also increased considerably over the 1990s^x with Brazil leading the regional way in developing technology transfer initiatives that target information technology, biotechnology and informatics that ensure internationally competitive standards and quality (OTP, 1997).

Galhardi's (1994) study of new biotechnology firms (NBF) in Brazil, further supports this perspective. Indigenous firms there are proactive in using the research knowledge and skills of regional universities, other indigenous firms and foreign firms. However, the key difference between the NBF in this DC and those examined for the US or other developed country (DVC), is found to be in their respective knowledge roles. In the latter, the NBF can operate as a 'research boutique' (Owain, 1998) where the larger transnational firm can use it to source new knowledge, insight and skills. The review of NASDAQ research employees later, stresses the greater NBF focus upon individuals with these skills over the larger more established firm. In the DC, the situation is reversed. The indigenous NBF sources the large firm for technology and knowledge. Flow of knowledge and technology therefore changes direction and hence the ability of the DVC transnational to shape the biotechnological sector is enhanced through a greater ability to manipulate that knowledge. This developing country focus activity, is in opposition to the perceived developed country focus of such firms (EFB, 1996).

Overall, these considerations of the knowledge role and access to relevant resources, place strategic limits on the choices available to the managers of a biotechnological business in the DVC and DC. The organisational structure and business activity of that company is constrained but in different ways. For the DC biotechnological firm, technology acquisition (rather than generation) brings codified knowledge to the DC industry, whilst activities pioneered by the state domestically (broadly defined) and with other governments, increase the overall stock of human capital available and the impact of TFP for the sector within that region. The DVC and DC firm also tend to face opposing customer demands and perceptions - with the choice between quality or price of a genetically modified product being superseded by availability of a product. The knowledge creating companies (using Nonaka's (1996) terminology) are very different between the DC and the DVC.

A broadening understanding

The importance of these regional differences have come to the attention of international business theorists. Casson (1991), Wyatt-Walter (1995) and Dunning (1997) suggest eclectic approaches to understanding the international business are appropriate precisely because of the accidental and constructed factor advantages in differing regions. By considering sector dynamics and key competitive issues that can be most effectively addressed by the firm and public policy, there can be a positive or negative change in human capital and TFP influences. This will, through the new growth theory perspective for example, implicitly include consideration of specific socio-economic local, regional and national dimensions that shape citizen and business people's activities, behaviours and perceptions. In this fashion, non-economic factors become a key consideration of sustainable competitive advantage. As a result, current orthodox international strategic arguments based around competition and adversarial activities are limited in their perspective and relevance (Burton, 1999). This merging of concepts is evidenced by policymakers adopting a more mixed strategic approach to the development and implementation of biotechnological policies and is one directly supported by the use of the Lawton IPE framework.

The biotechnology sector's industrial structure

In a sector of the economy that is reliant upon new knowledge and basic research, long industrial lead times and investment requirements are further factors shaping the firm's structural position. The poor profit performance of the majority of the sector's firms is highlighted by the sampled NASDAQ firms, where only 8 recorded a profit in 1998 (averaging 20.98m$). This was an increase though from the same sample's performance in 1997, where only 5 firms recorded a profit (averaging 11.6m$). The most spectacular profit loss was recorded by AXYS Pharmaceuticals of $203m$. This is partially explained by the fact that this it is a new company founded in 1998, investing heavily in research and development. When the age of the sampled firm is compared with the profit level, Table 2 is obtained. Figure 3 plots these values.

Table 3 indicates the degree of research reinvestment by the sampled firms as a percentage of firm turnover in 1998. Figure 4 plots this relationship.

The 1997 report on Science and Technology Indicators from the National Institute of Science and Technology Policy (NISTEP, 1997) in Japan, indicates for example, that the drugs and medicines industry maintains the highest R & D expenditure per sales ratio of any industry sector, with eight per cent minimum reinvestment. Of the sampled NASDAQ firms though, this reinvestment figure is considerably higher (see Table 3).

The biotechnological business is, unlike IT for example, constrained and in some instances promoted, by regulatory frameworks established for public health reasons, which vary country to country. Notably this includes in the biopharmaceutical sector the role of the state as a significant consumer (Powell and Pearson, 1995; IPTS, 1997). Welles (1999) describes these constraints as:

• Clinical failure
• Clinical success but market failure
• Delays in delivering products/research

Whilst market failure is a risk of all businesses, a three tier clinical market demand system produces market imperfections. With the doctor prescribing the drug, the patient taking it and the insurance company meeting the cost, neither the final demand nor the payment is controlled by the consumer. This mismatch between market supply and demand forces is further exacerbated by the nature of drug manufacture and clinical trials.

Preclinical laboratory tests are required for new drugs and which must support an application for clinical trials that have three phases. Each phase of the trials is subject to rigorous regulatory control. Phase I trials involve assessing safety aspects with healthy humans. Phase II involves administering the drug to a controlled limited patient population, whilst phase III expands this limited trial to a broader population in different geographic sites. Whilst Phase I and Phase II trials can often be supported internally by the company, Phase III trials require substantial territorial/global support and manufacturing capabilities and as only a limited number of firms are able to supply such resources, contract manufacturing becomes an additional key competitive factor in drug development (IPTS, 1997; Werner, 1998). Indeed, these essential supporting activities include corollary research programs of collaborative activities, information management and quality assurance (Werner, 1998). Only latterly have programmes to increase the dialogue between the consumer, scientist and biotechnology firm been addended to such activities (EFB, 1997; EFB, 1998; Joint Economic Committee, 1999).

With most small biotechnology firms limited in their potential to diversify product ranges, given capital development costs needed for state-of-the-art facilities, ethical concerns over testing (and viable alternatives), pressures upon salaries and the costs of purification of a biotechnology product (Powell and Pearson, 1995), most of them, can only carry as few as a handful of separate products lines (Werner, 1998).

Furthermore for an EU oriented biotechnology firm, coping with 15 different public health care policies and regulatory requirements, only adds to the complexity and potential difficulty of generating new products (Hayward, 1998). A supportive institutional environment that readily works with the firm on clinical testing issues through provision of those relevant power factors described, endows that firm with a distinct competitive advantage (Thumm, 1999; Wolf, 1999). For example, Singapore is recognised within the sector, as being able to supply all the necessary resources for biotechnology clinical trials, which in conjunction with an aggressive funding regime ($2b devoted to biotechnological R & D in the current National Technology Plan), enables indigenous firms to rapidly gain market share through exchanges of those resource factors with foreign firms (BioAsia Monitor, 1998). In contrast, the Federal Drug Authority (FDA) in the US whilst remaining a significant structural gatekeeper to the US market, has experienced budget increases that have largely been eaten up by inflation and reducing its capacity to promote its preferred standards and practises (Wechsler, 1998).

Biotechnology firm types

Welles (1999) further argues that biotechnology firms are a mix of three types of enterprise. These three enterprise types necessitate different policy measures. Implicitly therefore, the structure of the industry demands the mixed strategic approach because of these firm types as well as through the different locational factor differences already discussed.

The first generation of biotechnology firm (type I) is an integrated research and development (R & D) venture, concerned with in house research, funding, marketing and production. The second generation biotechnology firm (type II) operates as a drug discovery company, more concerned with bio-prospecting to find a new competitive advantage than leaving all research to an in-house team (Kupper, 1999). Finally, the third generation of biotechnology firm (type III) is the drug development company, which develops existing drug and biotechnology knowledge. It might therefore be expected that this type of biotechnology firm would foster more extensive collaborative agreements (such as technology licensing) to develop its product portfolio, whilst the type I firm has slightly less of an incentive to foster such functionally oriented collaborative activities, due to a potential dilution of in house capabilities. Such type III firm strategies generally however, are not necessarily just the remit of small firms. Powell and Pearson (1995) give the example of Hoffman la Roche & Co. which introduced and marketed an antibiotic, Rocephin. This had already been developed but not previously marketed.

The type III biotechnology firm, has significantly different requirements and needs from their business environment. With reduced in house capital needs, less overt distant knowledge appropriability problems through bioprospecting and outsourced research activities, their main policy support reliance is upon infrastructural routes for knowledge dissemination, communication and co-operation. Delays arising from clinically rejected or market driven causes are less of a problem for a company that pursues many different product lines. Type I or II firms with substantial resources can obviate some of their difficulties by using type III firms and/or start up ventures as the technology transfer conduits mentioned earlier (Powell and Pearson, 1995; BioAsia Monitor, 1998)^xi.

Finally, the type III firm is not concerned with direct in house, nor capital intensive research, but directs its attention to the already abundant knowledge that has been made available through existing research but which has not yet been commercially developed. Such firms tend to maintain extensive links with University R & D staff whilst operating as a virtual entity and are able to be more proactive in adjusting to changing consumer perceptions and regulatory environments (the US modified its Biosafety Regulation 4 times to 1995 alone (Commandeur, 1996)). This has less capital requirements, facilitates a greater product range and hence has less associated market risk for the firm. Typically, this has been the strategy pursued by EU biotechnology international companies (Hayward, 1998). The research and skill emphasis changes from cutting edge new-to-the-world knowledge and speed of research, to methodical examination and insight. This demands highly skilled individuals with extensive experience and an ability to recognise potential and as such, these firms emerge and are dominant in developed countries (DC) with significant competitive human resource strengths. Evidence for these skills may be found by examining the R & D staff composition of firm human resources.

Applying the Welles (1999) classification table to the sampled NASDAQ firms, reveals a generally good fit, although several of the companies reviewed are in the process of moving between firm types (through the development of in house manufacturing facilities for example). Moreover, a handful of firms are developing both in house basic research skills in conjunction with a manufacturing presence (a type III to II to I firm).

Ignoring the transitional firm types (due to insufficient data), table 4 suggests that the type III firm is in fact more collaboratively active, whilst type I firms are the least collaboratively active as was suggested earlier.

In addition, 52% of the sampled NASDAQ firms provided information on human resource issues, although only 37% were EU defined SMEs (from the employment perspective (CEC, 1998)). Of that 37%, the average number of staff employed was 100. The range of staff employed for all the sampled NASDAQ firms however, ranged from 6 to 2100 employees. 11 firms disclosed the proportion of staff that were researcher focused (23% of total) and of that sample, 73% were SMEs. The average number of research staff in those SMEs was 58 employees. Therefore for the SMEs sampled, 58% of their staff were on average, research workers. When all the sampled firms are reconsidered that provided staff research information, the average proportion falls to 27%. A specific focus on research highlights an average 18% of the workforce for the biotechnology firms are doctorates. The comparative importance of research workers to the smaller firm is clear from the sample.

The importance of these human resource and knowledge factors through collaboration activities for sustaining competitive strength is highlighted by the differences between the types of biotechnology company operating in developed (DC) and developing countries (DVC). Solleiro and Castañon (1999) in a review of the strategies of successful Latin American biotechnological firms, stress the importance of a suitable and embedded infrastructural environment to foster the different types of company (type I, II and III). Type III firms though, can successfully operate in Latin America through a mixture of portfolio investments and developed commercial partnerships with global biotechnological companies under the rubric of contract manufacturing and distribution as production competitive factors. From a holistic policy perspective, the type I firm is heavily dependent upon three dimensions of the support environment:

• Availability of capital
• Availability of skills and knowledge (including databases, journals, access to talented

• Clinical and healthcare requirements (for biopharmaceutical ventures) and market acceptability (for food and agro based products)

This places demands upon policy measures in terms of financial and knowledge support whilst operating a 'friendly' clinical environment. The UK, Canada and Australia for example are currently investigating methods of economically evaluating new drugs for their welfare services amongst broader healthcare reforms (IPTS, 1997), whilst the German clinical trials environment is argued to be driving investment out of the country and to the US (Slater, 1996; Slater, 1998). In the US, the Prescription Drug User Free Act (PDUFA) is using revenues to finance drug evaluations and increase the rate and acceptance of new drugs (Wechsler, 1998).

In the Japanese market, the regulatory environment for pharmaceutical products is intensive through internal competition (through approximately 1500 domestic firms) and mandates that the prices for drugs must be reduced every two years, creating an incentive for new product development by necessarily ensuring short product lifetimes (BioAsia Monitor, 1998). Indeed, very little export income is generated by these firms, which serve primarily the second largest domestic market in the world (see Table 5). Submission of new drug applications (NDA) by foreign firms have been greater than domestic firms since 1990 in Japan, as EU and US companies begin to sell directly to the market (Kawamura, 1998).

In accordance with the 'fit' argument that extends to secondary market factors, certain types of knowledge and the structural factors, will be more directly appropriable by host nation subsidiaries and firms than others (Metcalfe, 1998; Welles, 1999). For example, EU orchestrated technological support mechanisms are dependent upon information and knowledge flows between international businesses and nation-states that rely upon the environmental background of the individuals responsible for encoding and decoding that knowledge and information. Hence there is a suggestion of an evolutionary flow between the types of biotechnology firm described previously (at least in the sense of market maturity) (Buckley and Casson, 1976 quoted by Kogut and Zander, 1993).

At first glance, the composite nature of the EU suggests that these differing regional and national environment backgrounds would be a particular difficulty not found in the other global biotechnological nodes of potential structural and relational power which are more homogenous, such as the USA and the Pacific Rim. This is in fact a common focus of the most recent review of the EU's Framework Programme (CEC, 1997a). However, the metamorphosis of policy to embrace multiple objectives, encompass increased numbers of actors and expansion into educational and entrepreneurial arenas, recognises the need for a common European frame of reference and the creation of a shared awareness. It can also provide a diverse mix of existing (historical) biotechnological competences, which from a firm competence perspective, helps underpin sustainable competitive advantage. The very complexity of the EU biotechnology market may therefore be a source of competitive advantage.

For type II biotechnology firms more concerned with gaining a competitive advantage by casting a wide knowledge net, rather than the narrow one with type I firms, capital requirements whilst high, would arguably be more dependent upon prospecting 'success'. This has implications for the intellectual property regime of the host and home region/state, the meaning of a common 'natural heritage' and 'preservation of biodiversity' (DaSilva and Taylor, 1998). The UN Convention on Biological Diversity's (operational from December 1993) discussion on the ownership of genetic resources with a sovereignty caveat and the slow development of the EU Directive on Protection of Biotechnological Inventions from 1988^xii (EFB, 1996; Thumm, 1999), illustrate that existing national and regional patent rights are difficult to enforce and validate^xiii, yet are viewed as being a requirement for sustainable competitiveness. This viewpoint is not wholly supported as the mix of soft perceptional issues and hard patent / intellectual property issues between the actors of the IPE model with questions of the welfare necessity of biotechnological products, continues to hamper universal agreement on progression with biodiversity, indigenous and community rights and fair market protection (Commandeur, 1996; Commandeur et al. 1996; Seiler, 1998; Ghijsen, 1999; Nijar, 1999).

Both type II and type III firms face significant purification problems with new products where these downstream separation costs can be the most expensive stage of new product development (NPD). It is therefore no surprise that bioprocessing is a key element in all Triad biotechnological support policies (NSTC, 1999) (see Table 7). Equally, the development of supporting bioinformatics is a prerequisite of a competitive developing biotechnological industry given its dependence upon the volumes of data generated. Gaining additional insight and knowledge in these areas would constitute a significant source of competitive advantage.

With a global market estimated to be around $100b in 2000, roughly equally divided amongst the Triad regions (CEC, 1999), the policy direction of national R & D funds in these regions presents an interesting contrast. As Table 6 highlights, there have been opposite spending directions in the US and Japan.

In the biotechnology sector, Japan is reorientating its spending priorities so as to reflect particular country characteristics. On the basis of the importance of knowledge in technological industries, especially new to the world knowledge in the biotechnological sector, government investment is increasing in basic R & D initiatives and facility development (NISTEP, 1997). The importance of knowledge in the economy of a DVC mandates Japan addressing this particular problem so as to ensure TFP benefits in the future. The argument is largely reversed for other Asian economies that lack the substantial and integrated industrial base of Japan and are seeking to develop this as an outlet for the previous intensive investment in basic R & D and human capital issues since the mid 1980's. The refocus of Japanese biotechnological competitiveness is further emphasised by the importance of Health as the largest academic field in terms of the number of R & D scientists/engineers within the natural sciences (NISTEP, 1997). Further supporting the 'fit' argument, the most numerous academic societies in 1995 were in the medical and humanities areas in Japan. It is therefore no surprise to note that Japan also has a large share of scientific papers in pharmacology, much higher for example than other emerging technological commercial markets such as earth and environmental science (NISTEP, 1997).

The STA (1998) report on Globalization and the Japanese economy stresses these themes by acknowledging the broad economic function served by near and far markets for Japanese firms. The former, largely in the proximity of Japan, served to reduce production costs whilst developing a market base (which has become more important as these countries have industrialized)^xiv, whilst the latter (far) market is home to both consumer and knowledge, with in-particular the protection of that knowledge. These factors are also regularly identified as key issues for foreign firms (non domiciled) to collaborate with other home firms (Dalton and Serapio, 1995; Trott, 1998). Arguably therefore, the regional dynamic was more important for securing firm competitiveness in host countries. Furthermore, NISTEP (1997) identifies that 90% of foreign researchers entering Japan in 1995 came from other Asian countries and were study and training focused. From the Japanese perspective, the level of researchers leaving for DC's has been falling since 1993, yet the number of individuals being despatched for cultural reasons to DCs has been increasing, especially to Central and South America. Arguably this suggests that access to relevant knowledge, as with Case 1 and 2, requires the development of an understanding of both the market and culture within that environment.

Table 8 outlines some of the different incentive schemes established within national boundaries and from an EU perspective, whilst table 9 reviews the explicit EU biotechnology programmes. Importantly the DVCs tend to maintain control over entry to their market where despite no explicit limits on access to any firm to any EU initiative, implicit constraints do apply in US, EU and Japanese initiatives. For the exploitation of knowledge, initiatives excluded non domestic/domiciled firms unless mutual benefit could be assured through knowledge exchanges and/or manufacture in the home market. However where industries are identified as being strategic, including the enabling technologies in which a case by case basis applied unless specific bilateral arrangements had been previously engineered. Obvious fears over transferring knowledge, intellectual property and competitive advantage to non-domestic firms drives these constraints. There is also a recognised shift in attitudes between DVC and DC firms however, where less knowledge based concerns were evident for firms from DVC except in the strategically identified sectors. When programmes were strictly confined to domestic firms only, notably in the strategic sectors including biotechnology, three clear situations can be defined by reviewing the construction of the support programme. They revolve around a pure internal focus (in this case either nation-state or regional grouping), an expansionist focus (where non home domiciled firms are allowed access potentially subject to reciprocity, transparency and exploitation) and a globally focused initiative which seeks from the start to incorporate all leading industrial actors in an initiative. Such programmes for example would aim to develop standards for an industry.

This paper has reviewed the development of the biotechnology sector, with a focus upon the specific competitive factors underpinning that market sector from an international political economy perspective. By identifying successful positioning within the industry as derived from the structural power of the company, or rather its ability to shape the industry to preferred norms of operation and practises through data such as collaborative partners, the activities of public and private policies were examined. Important secondary factors that mediate this structural capacity were also identified. This was undertaken using secondary data, insights gained from a small sample of US NASDAQ quoted biotechnology firms and comparative lessons from the IT sector.

With a focus upon the four structural power factors of knowledge, production, finance and security, the actions and preferred orientations of the actors involved in the development of the industry were examined. This interaction is the focus of the IPE diplomacy model, which was used as a guide to the dominant inter-relationships between governance levels, actors and other bodies. All four factors are stressed within the sector, from security issues with biodiversity, production with purification techniques, finance with drug development costs and knowledge through TRIPs / sui generis protection systems, as underpinning all these factors especially for the smaller biotechnology firm in the developed country. The strong triad relationship was evident in this sector, especially in terms of the direction and dominance of developed country knowledge flows. Indeed, the strong structural position of firms from such regions, was evidenced in the manner in which they construct agreements and support programmes for non-triad regions and how access to national markets by other globally competitive firms, is carefully managed.

Using the IPE framework however, also illustrated the relevance of non traditional strategic issues for such firms, including gender, ideology, specific locational concerns, perceptions, biosafety and intellectual property systems, that have ensured the development of resource bases in varying regions (through different knowledge and practises) that are also driving the development of the sector. These broader strategy and policy concerns have helped certain parts of the world obtain a better fit between the needs of the biotechnology sector and what the local environment can supply.

In conclusion, the policy support environment for biotechnology firms, is a complex mix of factors, some of which are part of the national identity, whilst others are being actively constructed by dominant actors. This paper has highlighted the validity of viewing the sector as comprised of at least three basic firm types, with different knowledge roles depending upon the location of the firm. Adopting an IPE perspective allows greater understanding to be made of this complexity.

ⁱ Powell and Pearson (1995) commented on the emerging bipolar nature of the pharmaceutical industry in particular in their analysis of SME strategies in this sector.

ⁱⁱ In the 1994 review of EU Industrial Policy and Competitiveness (COM (94) 319 Final, 1994), the technological development and industry R & D intensity was equated with that of increased competitiveness - ostensibly a simple linear and causal viewpoint. Basic research remains as an important pre-requisite of policy support (Adam, 1997). The association of competitiveness with non technological issues (welfare) was slight, with minimal attention given to historical and cultural attributes. Educational policies were however singled out as a focus for competitiveness, which has more recently been developed through the Innovation Plan and Framework IV and V and specific sectoral initiatives in areas such as biotechnology.

ⁱⁱⁱ In certain sectors such as automotive research, and in particular biotechnology, important and significant research outside of the home base of the international business is increasingly common (Dalton and Serapio, 1995).

^iv This largely revolved around a transition to a more meritocratic society, less ready to identify age with superiority or wisdom. In addition, structural changes in the nature of student recruitment and perceptions of basic research were argued for.

^v Perspectives for Biotechnology in the Caribbean (DaSilva and Taylor, 1998).

^vi Phase II of the programme has a budget of 9.265mECU. Source from http://www.europa.eu.int, 27th April 1999.

^vii This is the 'Memorandum on Understanding' (COM(94) 319 Final, 1994).

^viii The PHARE programme has already sought to develop such objectives through standardisation and certification.

^ix These are the sectors where the final GATT Uruguay Round had significant difficulties.

^x The 1994 R & D to GDP funding ratio was 0.7%.

^xi In particular, the rationalization of Australian support services for start up firms in 1996 (with the creation of the START programme) created an indirect push for alliances with foreign firms, when the domestic knowledge transfer was constrained.

^xii The EU Directive on Protection of Biotechnological Inventions was accepted by the European Parliament in May, 1998 although continuing controversy is likely as the patent's articles are used and tested.

^xiii Barnum (1993) for example reported the alleged cases of spying occurring with San Francisco Biotech firms and which was subsequently investigated by the FBI. The culprits were suggested as being Pacific Rim companies. Thumm (1999) identifies that the European Patent Convention (EPC) is still far from a harmonized legal framework which is amplified when issues of 'patenting life' are considered.

^xiv The GDP of the East Asian market (NIE,s, ASEAN4 and China) expanded from $656.8b in 1986 to $2,165.3b in 1995 - over a 300% increase. Over the same time period, the US GDP expanded by 170% and the EU's by 230% (STA, 1998).

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