The Impact Of Regulatory Stringency On The Foreign Direct Investment Of Global Pharmaceutical Firms

Abstract

Cross-national regulatory differences in safety, price and intellectual property protection are an inherent feature of the operating environment of the global pharmaceutical firm. Institutional, transaction cost and more recent ‘race to the bottom’ theories assume that regulation represents a cost to the firm; therefore firms ‘vote with their feet’ and avoid investment in stringently regulated markets. However, a cross-national empirical study of the FDI levels of 20 firms across 19 markets reveals that regulatory stringency is not related to FDI, and price control stringency is positively related to FDI, when controlling for other market factors. National governments are not powerless in games of regulatory arbitrage, and have in fact developed adaptive strategies to maintain high regulatory standards and FDI simultaneously. Furthermore, global firms weigh various factors in their investment decisions, and suffer from classic optimisation problems, including information asymmetries and bounded rationality, which prevent total ‘regulatory optimisation’. The implications for existing theories of international business, globalisation and regulation are discussed.international business, foreign direct investment (FDI), globalisation, regulation, responses to regulation, political economy