Is drug patent protection a determinant of the location of pharmaceutical FDI? : China's experience

The economic literature reveals that the relationship between patents and Foreign Direct Investments (FDI) depends on industries and countries’ features. Our research considers the pharmaceutical industry in China. This choice stems from a contradictory observation: China is known for its important imitation capacities, but at the same time, it is becoming one of the most attractive destinations to technology intensive FDI, for instance, pharmaceutical FDI. To explore whether patent protection plays a role in attracting pharmaceutical FDI in China we conduct a documentary analysis over the 1980–2015 period. Data is compiled from specialized press and international and national economic institutions (such as the World Trade Organization-WTO and the Chinese Intellectual Property Office - SIPO). Using these statistics, we construct a composite index measuring the pharmaceutical patent protection in China (PPP index) to analyze its correlation with inward pharmaceutical FDI. For a better reliability of the results, the study considers only the forms of FDI that are - according to economic literature - the most sensitive to patent protection, i.e., drugs producing and/or research and development (R&D) FDI. Our analysis suggests that enhancing drug patent protection could have had a positive impact on inward pharmaceutical FDI in China, especially R&D subsidiaries. However, this impact is conditioned by the existence of other advantages for FDI location such as the development of technology parks and the knowledge-based human capital policy. Hence, drug patent protection would be a determinant for attracting pharmaceutical FDI provided that it is a part of a strong innovation system and active innovation policies.