The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

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The Pharmaceutical Price Regulation Scheme Incentives to locate investment in the UK 3.26 Internationally mobile investments such as R&D and some manufacturing investments are also important from an ‘industrial policy’ perspective. For a variety of reasons – such as the spillover effects R&D may have on other sectors and its consequent contribution to economic growth – many governments seek to encourage companies to locate these investments within their national boundaries, and use a range of industrial policy instruments in an attempt to do so. 3.27 Some stakeholders regard the PPRS as an important component of the UK Government’s industrial policy towards the pharmaceutical industry – that is, as a means of attracting and retaining pharmaceutical R&D and other internationally mobile investments within the UK. While major stakeholders disagree over whether this is one of the scheme’s aims, it is important to assess whether the PPRS does achieve such objectives in practice. Rationale for attracting pharmaceutical investment in the UK 3.28 The industrial policy of the UK Government (and indeed other governments) focusses on attracting and retaining investment in the international (and therefore ‘footloose’) component of the supply chain. This was part of the rationale behind the creation of the Pharmaceutical Industry Competitiveness Taskforce (PICTF), which is now known as the Ministerial Industry Strategy Group (MISG). 3.29 Consistent with this goal, the UK Government announced in 2004 that it was setting a new target for attracting R&D into the UK across the whole economy "… because we want Britain to be the most attractive location in the world for science and innovation, we are setting a new and ambitious target of increasing UK R&D investment as a proportion of national income from its current level of 1.9 per cent to 2.5 per cent by 2014 over the next decade." 27 3.30 Of the various potential economic rationales for attracting R&D in the UK, the most plausible are those that are based on geographical spillovers – that is, benefits from R&D that accrue to other companies located near the investment in question. Other potential justifications are less compelling and, in some cases, are based on a conflation of the aim of attracting investment in the UK with that of supporting UK-owned firms, whether located in the UK or not. 28 3.31 A previous attempt to quantify these benefits – conducted for PICTF in 2000 – suggested R&D spillovers and labour rents could reach up to £520m. It also suggested that there is a potential terms of trade effect of between £1 and £2bn, although this figure is a significant overestimate as it takes no account of offsetting effects – namely the fact that resources currently allocated to the pharmaceutical sector would be used elsewhere to produce exportable goods or to replace imported goods. We think there would be merit in revisiting some of the calculations in light of more recent data and the considerations set out in the present report. 27 Source: The UK Government’s Science and Innovation Investment Framework 2004-2014, published in July 2004. 28 Such a goal is not, to our knowledge, consistent with current Government policy. Further, the global nature of share ownership means that it would be unclear to what extent any individual firm is solely or even mainly owned by UK citizens. 44
February 2007 UK success in attracting pharmaceutical R&D investment 3.32 The figure below shows total Business Expenditure on R&D (BERD) as a percentage of GDP across several countries for 2002 and 2003 (the most recent years for which data were available). Against this measure, the UK was the fourth most successful country in attracting pharmaceutical R&D investment in the world. 3.33 In 2002 pharmaceutical industry business expenditure on R&D accounted for 0.33 per cent of GDP in the UK. This compares with Sweden (0.61 per cent), Denmark (0.4 per cent) and Belgium (0.39 per cent). Notably, the UK is the highest performing of the larger economies, ahead of France and Japan (both 0.19 per cent), the US (0.14 per cent) and Germany (0.13 per cent). 3.34 The important question from a policy perspective is which factors help to explain the ability of the UK to attract and retain investment. Figure 3.5: Pharmaceutical BERD as a percentage of GDP, 2002/2003 3.25 3.00 2.75 2.50 Pharma BERD (% GDP) Other BERD (% GDP) 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Belgium Canada (2003) Denmark Finland (2003) France Germany (2003) Italy (2003) Japan Netherlands Spain Sweden (2003) United Kingdom United States Source: OECD (Figures relate to 2002 unless otherwise stated) Does PPRS attract investment into the UK? 3.35 Our analysis of the workings of the profit cap element of the PPRS has shown that, contrary to widespread perceptions, the scheme does not contain any systematic incentives to locate investments within the UK. 3.36 The R&D allowances provided for under the scheme can, in principle, relate to R&D investment anywhere in the world. The allowances, therefore, provide no incentive to locate R&D investments in the UK. Strikingly, in discussions with the OFT, some scheme members seemed to believe that R&D allowances were only available for R&D undertaken in the UK. These tended, however, to be large firms for whom R&D investment in the UK alone 45
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The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

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