Possible and appropriate foreign market entry modes for PharmaUK to launch “NovaRelief” in India. An analysis


Term Paper, 2015
15 Pages, Grade: 78% = 1,3

Excerpt

Table of Content

Introduction

I. Key factors of India as a new foreign market for PharmaUK’s new product “NovaRelief”

II. Four possible entry mode options for PharmaUK to enter the pharmaceutical market in India
Option 1: PharmaUK manufactures “NovaRelief” in UK and lets local sales agent handle marketing
Option 2: PharmaUK enters into a licensing agreement with a local pharmaceutical firm in India to manufacture and market “NovaRelief”
Option 3: PharmaUK sets up a wholly owned foreign manufacturing subsidiary in the India and uses a local sales agent in India to handle marketing
Option 4: PharmaUK sets up a wholly-owned foreign subsidiary in India to manufacture and market “NovaRelief”

III. Recommendation which one of the four entry mode options PharmaUK should adopt for entering India

Conclusion

References

Appendices

Executive Summary

This business report focuses on the analysis of the four foreign entry modes for PharmaUK to enter the Indian pharmaceutical market. The four possible options are: manufacturing “NovaRelief” in UK and letting local sales agent handle marketing, entering into a licensing agreement with a local pharmaceutical firm in India to manufacture and market NovaRelief, setting up a wholly owned foreign manufacturing subsidiary in the India and using local sales agent in India to handle marketing, or setting up a wholly-owned foreign subsidiary in India to manufacture and market NovaRelief.

India’s growing economy, GNP, GDP per capita and low cost but high skilled labour force are inviting factors for PharmaUK to enter India. India’s growing aging population, improvement of India’s healthcare infrastructure and financing, and high burden of disease are major drivers towards entering the market. Government incentives and the recent implementation of the TRIPS agreement enhance growth of pharmaceutical firms in India. India’s high level of corruption and bribery are major barriers for establishing businesses in India. Moreover, deficient infrastructure involving poor distribution in rural areas, where medication is strongly needed and bureaucratic delays still hinder growth of businesses in India.

Exporting NovaRelief as a new drug to India requires an import license approved by the Central Drugs Standard Control Organization. Location economies and experience curve effects can be created, leading to decreasing production costs and increasing profitability for PharmaUK. Sales agents can help PharmaUK with its extensive knowledge of important target markets and local customs. However, losing control over brand image and marketing is probable. When PharmaUK out-licenses NovaRelief, it may realise a return without having additional expenses accrued by marketing, distributing, and selling NovaRelief. However, it is probable that licensees harm NovaReliefs’ quality and thus PharmaUK’s reputation by not following important standards. Moreover, creation of competition is possible by prior licensee. For setting up a wholly owned subsidiary, 100 per cent FDI is permitted for PharmaUK when conducting a greenfield investment in India. Full control over PharmaUK’s unique knowledge and production technology, which minimises risk of losing its comparative advantage and core competencies to competitors in the IPM are secured by using this entry mode. Synergies are possible and knowledge of local needs is easier to increase. As PharmaUK can handle marketing on its own, it does not need sales agent to handle the marketing as there is always the risk of transferring PharmaUK’s businesses secrets to competitors. When PharmaUK market NovaRelief on its own, it avoids negative effects arisen by having local agents. Having full control over value chain and being able to maximise value at each stage of its value chain are major advantages.

It is recommended that PharmaUK sets up a wholly owned subsidiary in India and market NovaRelief on its own as it possesses appropriate ownership and locational advantages to generate internalisation advantages being very important for a pharmaceutical firm, having unique know-how and technology which may be not protected when exporting or out-licensing NovaRelief. As a result, an overall cost-leadership as a generic competitive strategy as PharmaUK’s competitive advantage is created. The combination of a patent and cost leadership approach generate high revenues due to low production costs, leading to decreasing production costs and increasing profitability and high selling price which puts PharmaUK in a strong competitive position in the IPM. All these factors enhance PharmaUK to expand its businesses and India and to be a strong competitor in the IPM.

Introduction

This business report analyses four possible foreign market entry modes for a small pharmaceutical UK firm called “PharmaUK” and recommends which one of the entry mode options PharmaUK should adopt for entering India. PharmaUK has recently developed a new type of painkiller medication called “NovaRelief” by using its unique knowledge and technology. As it is a new type of painkiller medication, it can be considered to be a “new drug”, meaning that it has not been used in India before. PharmaUK has decided to launch its new product in India and commissioned our consultancy company to provide services to PharmaUK regarding the most appropriate entry mode.

This report starts with presenting the key factors of India as a new foreign market followed by comparing and contrasting the four possible entry modes for PharmaUK. In the end, a recommendation on which entry mode to choose is given by our consultancy firm.

I. Key factors of India as a new foreign market for PharmaUK’s new product “NovaRelief”

India, a developing country located in South-Asia with a growing population (Appendix 1) is considered to be one of the most growing economies of the world (EY, 2015). With a growing GNP (Appendix 2) and GDP per capita (Appendix 3), India possesses a growing purchasing power therefore people are more able to afford more expensive goods.

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The India pharmaceutical market (IPM) is a very attractive market for foreign companies to enter as it is expected that this market will belong to the top ten sales markets by 2020. Cheap labour and low development costs are inviting factors for establishing businesses in India. Concerning the growing population and data of India’s GNP and GDP per capita, it can be stated that a large middle-class is created and thus a possible increased demand for western medicines (Pwc, 2012). Furthermore, it is forecasted that India’s aging population is increasing in future, being very important for demand of medical drugs. Other major factors increasing demand include the improvement of India’s healthcare infrastructure and financing, and high burden of disease (Pwc, 2015). The government provides incentives such as tax incentives for pharmaceutical firms to boost the market’s attractiveness for foreign firms (Ministry of Science and Technology, 2015). The IPM is predominantly dominated by branded generics, composing about 70% to 80% of the market (Tripathi et al, 2015). Since the implementation of the TRIPS Agreement in 2004, pharmaceutical firms can now apply for a patent on new medicines and thus are more able to increase prices and prevent competition. This is a significant advantage for the firm. However, in developing countries such as India important new medicines are not affordable for a lot of people, being dependent on cheap drugs (WHO, 2005).

Despite the inviting factors, India’s high level of corruption and bribery should be considered (Transparency International, 2015). Moreover, India still suffers from deficient infrastructure involving poor distribution in rural areas, where medication is strongly needed. Bureaucratic delays should also be considered (Government UK, 2015).

II. Four possible entry mode options for PharmaUK to enter the pharmaceutical market in India

Option 1: PharmaUK manufactures “NovaRelief” in UK and lets local sales agent handle marketing

When PharmaUK manufactures NovaRelief in UK and exports it to India, it still has full control over its unique knowledge and production technology. Location economies and experience curve effects may be realised which lead to decreasing production costs and increasing profitability. Furthermore, exporting is less costly than establishing operations in India. When exporting NovaRelief to India, PharmaUK is required to apply for an import license which can be done by an Indian agent. Moreover, since PharmaUK’s product is a new drug, it needs to be approved by the Central Drugs Standard Control Organization in India before an import license is given. This would take a long time and may involve additional costs. For this whole situation, a local sales agent would be helpful. He not only may help with the procedure of applying for an import licence but also knows important contacts in this market and local customs (Sarda Rohit et al, 2012). These agents have a broad knowledge of the target market. Furthermore, local sales agents replace PharmaUK’s expensive costs for training and recruiting own employees who might be entering the IPM (Hill, 2008).

However, when PharmaUK decides to export to India and lets Indian sales agents handle the work, losing control over brand image and marketing is probable. (Sarda Rohit et al, 2012). It also has to pay a high commission. Moreover, exporting this pharmaceutical product may face high transportation costs and tariffs (CBEC, 2015).

Option 2: PharmaUK enters into a licensing agreement with a local pharmaceutical firm in India to manufacture and market “NovaRelief”

In-licensing a product from drug manufacturers overseas is a common strategic way for major Indian drug companies to boost sales in their domestic market (Joseph, 2015). Therefore, out-licensing would be a welcomed entry mode for PharmaUK. In the case if PharmaUK makes a licensing agreement with a pharmaceutical firm in India, its main advantage is realising a return on NovaRelief without having additional expenses accrued by marketing, distributing, and selling NovaRelief (Hill, 2008). Moreover, a new potential market with high growth rates is granted for PharmaUK. However, after the licence agreement expires, PharmaUK may face the risk that the Indian licensee sells a similar product which may be more competitive and thus intensive competition may be created. Moreover, it is more difficult for PharmaUK to control its unique know-how and its licensee who might have an opportunistic behaviour. He may also not follow quality standards which may harm NovaReliefs’ quality and thus PharmaUK’s reputation (Johnson et al, 2015).

Option 3: PharmaUK sets up a wholly owned foreign manufacturing subsidiary in the India and uses a local sales agent in India to handle marketing

When PharmaUK decides to set up a wholly owned foreign manufacturing subsidiary in India, it can do that by greenfield or brownfield investment.

India’s FDI policy for the IPM regulates that no prior approval for investment of the Reverse Bank of India or government for greenfield investment (GI) is needed under the automatic route. That means that 100 per cent FDI is permitted for PharmaUK when conducting GI. For a brownfield investment, 100 per cent FDI is only permitted under the governmental approval route, meaning that a prior approval of the Reserve Bank of India or government is required (Government of India, 2015). Since the TRIPS implementation in India, PharmaUK has the right to patent NovaRelief in the market which is an important intellectual property to increase value of the businesses.

We consider in this situation that PharmaUK is going to conduct GI. When choosing this option, PharmaUK has full control over its unique knowledge and production technology, which minimises risk of losing core competencies (Prahalad and Hamel, 1990) to competitors. Furthermore, realising local economies, economies of scale and experience curve effects will be much easier, leading to decreasing production costs and increasing profitability. PharmaUK’s business operations are also under full control. India’s cheap but very skilled labour force enhances this development (Mazumdar, 2013). When setting up a wholly owned subsidiary, PharmaUK possesses its own labour force and ability to better control PharmaUK’s management and marketing & sales. Furthermore, synergies are possible and knowledge of local needs is easier to increase (Johnson et al, 2014). As PharmaUK has the capabilities to handle its marketing on its own, it should not take the risk to rely on a sales agent to handle marketing as there is always the risk that sales agents may transfer PharmaUK’s businesses secrets to competitors (Hill, 2008).

Option 4: PharmaUK sets up a wholly-owned foreign subsidiary in India to manufacture and market “NovaRelief”

India’s policy regulations regarding setting up a wholly-owned foreign subsidiary in India, advantages and disadvantages by doing this, apply for this option, too. In this case, PharmaUK has the option to manufacture and market its new product on its own.

When PharmaUK market its product on their own, it avoids negative effects arisen by having local agents as it handles its own local marketing, local sales and services. As a result, PharmaUK has stronger control over its marketing and sales activities in India and simultaneously, exploiting cost advantages from producing NovaRelief in a single location (Hill, 2008).

However, PharmaUK may have lacking knowledge of the IPM and also faces the risk of cultural barriers. Moreover, wholly owned subsidiaries are slow to establish and also very expensive (Barkema et al, 1996)

III. Recommendation which one of the four entry mode options PharmaUK should adopt for entering India

When evaluating all four options discussed above, it is recommended that PharmaUK chooses option 4 as it shows the most achievable advantages for PharmaUK.

According to the eclectic paradigm (Dunning, 2000), PharmaUK should undertake FDI as PharmaUK possesses appropriate ownership and locational advantages to generate internalisation advantages which are very important for a pharmaceutical firm, having unique know-how and technology which may be not protected when exporting or out-licensing NovaRelief (Qiu and Tao, 2001).

Ownership advantages: With PharmaUK’s unique know-how and production technology, PharmaUK has the capability and core competencies (Prahalad and Hamel, 1990) to enter the IPM and thus create a competitive advantage (Porter, 1980), leading to the ability to pre-empt competitors and taking a strong competitive position in this market (Johnson et al, 2015). Furthermore, Novarelief as a “new drug” for the IPM may have high potential in future to be a blockbuster for PharmaUK.

Internalisation advantages: For PharmaUK as a completely new pharmaceutical firm in the IPM, saving costs and efficiency play a significant role. Therefore, it should internalise to minimise transaction (Coase, 1937) and transportation costs and trade barriers by bypassing market imperfections (Rugman and Verbeke, 2007).

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Details

Title
Possible and appropriate foreign market entry modes for PharmaUK to launch “NovaRelief” in India. An analysis
College
Kingston University London
Grade
78% = 1,3
Author
Year
2015
Pages
15
Catalog Number
V341477
ISBN (eBook)
9783668315051
ISBN (Book)
9783668315068
File size
655 KB
Language
English
Tags
International Business, Culture, India, Pharmaceutical industry, Entry modes
Quote paper
Aylin Kadriye Tansel (Author), 2015, Possible and appropriate foreign market entry modes for PharmaUK to launch “NovaRelief” in India. An analysis, Munich, GRIN Verlag, https://www.grin.com/document/341477

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