Regulatory policy and the location of bio-pharmaceutical foreign direct investment in Europe

• Published in: Journal of health economics Vol. 30; no. 5; pp. 950 - 965
• Main Authors: Koenig, Pamina, MacGarvie, Megan
• Format: Journal Article
• Language: English
• Published: Netherlands Elsevier B.V 01.09.2011; Elsevier Sequoia S.A; Elsevier
• Subjects: Control; Cross-national analysis; Determinants; Direct foreign investment; Discrete choice model; Drug and Narcotic Control - economics; Drug Industry - economics; Drug Industry - legislation & jurisprudence; Economics; Economics and Finance; Empirical Research; Europe; Financing; Foreign direct investment; Foreign investment; Foreign investments; Geography; Health; Health administration; Health economics; Humanities and Social Sciences; Humans; Internationality; Investment; Investment decision; Investments - statistics & numerical data; Location; Location choices; Location of industry; Manycountries; Pharmaceutical industry; Policies; Position (location); Price control; Price regulations; Prices; Public Policy; Regulation; Regulatory policy; Sales; Studies; Wage & price controls; Europe; Price regulations; I18; Discrete choice model; Pharmaceutical industry; Location choices; F23
• ISSN: 0167-6296; 1879-1646
• DOI: 10.1016/j.jhealeco.2011.07.005

► We examine 527 investments in 27 European countries between 2002 and 2009 and find that investors are less likely to choose countries with price controls, after controlling for other determinants of investment. ► We observe a relative decline in investment in countries that increased the stringency of pharmaceutical price regulation during the sample period. ► The relationship between regulation and investment is restricted to non-manufacturing investments and is most robust for those related to administrative functions. This paper examines the relationship between cross-country differences in drug price regulation and the location of biopharmaceutical Foreign Direct Investment (FDI) in Europe. Simple theory predicts that price regulation in one country might affect total investment, but not the location of that investment, if sales are global. Nevertheless, some manufacturers threaten that the introduction of price regulation in a country will motivate them to move their investments to other countries. Are such threats cheap talk, or is there evidence that firms avoid price-controlling countries when making FDI location choices? We use data on 527 investments initiated in 27 European countries between 2002 and 2009 and find that investors are less likely to choose countries with price controls, after controlling for other determinants of investment. We also observe a relative decline in investment in countries that increased the stringency of regulatory regimes during our sample period. The effect is restricted to non-manufacturing investments and is most robust for those related to administrative functions.