FREE TRADE AND ISSUES OF FIRM LEGITIMACY
Abstract
When serving poor countries, a pharmaceutical firm will implement strategies that can ignite profitability despite relatively lower prices. One well-known effective strategy is price discrimination. It means “selling the same product to different groups of consumers at different prices” (2001 p. 303). This strategy involves environmental scanning and extensive monitoring to guard people, government, competitor and intermediary movements within a country. Unlike local manufacturer and small enterprise, a multinational firm deals with complex environment that establishes advantages and disadvantages of the profitability of price discrimination.
To say a firm that exercises this strategy to poor countries is generous is misleading and an exaggeration. Although a pharmaceutical firm undergoes long and expensive road to develop a single pill, the feat is less impressive and commendable as current trend shows that it tend to focus its resources to cater the medical needs of rich countries which serve as lucrative markets. Another is its hidden agenda of performing well in poor countries in view of institutional support for its research and development intended to benefit the high-end consumers. In aggregate, price differentiation serves as the measure of a global firm to maximize its potential in the pharmaceutical industry not simply extending its arms to poorer nations.
A Simple Firm Setting Prices
A rational firm operates with one thing in mind, profit. Because of this, pricing strategy is crucial to maximize the revenue it can generate. In general, there are four factors that affect the decision of a firm when setting prices for its products ( 2001 p. 303). The life cycle of the products has different stages and therefore requires flexible pricing strategy. Second is the aim of the firm that can range from more obvious profit maximization or simply to introduce a new product to a more aggressive and bold goal like driving the competitors’ away from the market. Third, competition the firm faces, and finally, the information it has on cost and demand in the open market.
However, when it is exposed in a larger and more complex international market, these factors become broad, almost vague, and a firm has added task to consider and analyze socio-cultural, legal, economic, competitive and distribution systems of different countries. This is the case of a multinational firm, specifically in the pharmaceutical industry. How can it operate in a poor country and still slice some part of the cake flavored by the profit dictum?
A Multinational Pharmaceutical Firm Going Charitable???
The fact that it takes 15 years and approximately 0 million to develop, research, test and launch a single drug in the market makes a charitable feat impractical on the part of a pharmaceutical firm (2003 p. 96). But is charity really on the foremost surface of a global pharmaceutical firm? It is a great challenge and risky venture to serve a poor country because of its common characteristics of being saturated by terrorists, inadequate infrastructure, demise buying power of people and opportunistic and inefficient government. These results to higher tariffs and trade restrictions, difficult and costly transportation of products, threats of robbery and kidnapping, and ultimately, sell medical products at a loss that turns a charitable endeavor to unprofitable project.
No wonder, global pharmaceutical companies accounted for a tiny 0.50% of their over-all international sales in Africa but the country has nearly 25% of the world’s disease burden. They tend to target attractive markets and invest heavily on drugs that can cure most of the rich countries’ disease. With this in mind, the assumption that it will prioritize parasitic illnesses prevalent in poor countries like Malaria which cost only of vaccine to save a person’s life for a year is low against ,000 needed to save a person’s life from breast cancer for the same period. In addition, India’s fourth largest pharmaceutical company in the world focuses research for Western markets (Williams 2005). An indication that even in developing countries, which is relatively more aware and accessible to poor countries, prioritize the profit dictum.
For a firm in this kind of industry, to maintain a price discrimination scheme can be profitable when operating globally. The scheme means to set prices differently across countries based on their people’s purchasing power, support of the host government and other institutions, incentive of trade restrictions, competition and frequency of distribution markets. Since poor countries have vicious cycle of household problems in education, food and nutrition, displacement and health, medicine prices would be driven to low levels.
However, when competition is heavy in the poor country and likely there are price war engagements, the situated price of a firm could be insisted lower. Because price discrimination is impossible in perfect competition, the firm is torn between profits and market power notwithstanding trade policies and counter-strategies of other global firms. Another disincentive is the possibility of consumers to resell the discriminate prices to rich countries. The differences of prices across countries can hurt the reputation of a firm and disturb its strategies. Lastly, because poor countries have elastic demands, one wrong move to increase its price to recoup firm’s investments or save it from occurring net loss can cause disaster and loss of market (2001 p. 312-313).
In any circumstances, from good to bad investment and target countries, a firm’s drive of profit and solicited or unsolicited incentives are its core motivation. Charity and social contribution just sprout as by-products of self-vested interests of purely competitive, goal-driven and practical international businesses. The lowering of prices in poor countries creates market power by preventing entry of a potential competitor that could result to low but sustainable profits. The large customer base offsets decline in price levels. Besides, such endeavor could receive and insist funding from home or host countries and other international organizations for the more important research and development undertakings.
Finally, the kind-hearted, applauded-hero and philanthropist pharmaceutical firm is recognized at the international stage through awards by international organizations and gaining the much-needed publicity. Unknowingly, many people in the world are benefited but also blinded. Like a guy acting gentle and kind to a lady always has his “hidden desires” from simple admiration to lust. Similarly, as a firm seats and looks at its certificates and trophies, it already signed contract with an institute for 5-year research of a certain pill to be marketed in rich countries. Patent of the product is to the firm. All in all, the deception is a continuous, repeated process.
Conclusion
So far, we have succeeded to prove the proposition about MNC superiority to execute market transactions at both pre-access and actual operations. The former is explicit on MNC qualities while the latter is implicit and gives rise to active comparison of MNC and small firms. The section on pre-access and government intervention has provided a finding that MNC can maximize benefits of the host country through imparting social responsibilities without disrupting instead reinforcing social balance. On the other hand, the section on actual operations and customer preference implied that MNC have the optimal qualities to offer products and services that have the potential to resolve all quality conventions of the market. Such conventions include domestic (trust, traditional mode of production), public (recognition consumers give to trademarks/ brands), civic (societal benefits), industrial (efficiency and reliability) and commercial (price and commercial qualities).
However, to establish the other side of argument is undermined because the proposition has piloted us towards mental mode bias due to our awareness of cross border success of big companies. For this purpose, it is helpful to mention some factors where margin for errors may emanate that could provide substantial doubt about our findings, or ultimately, suggest default. One is the economic state of the contracting parties. A host country that belongs under developed nations (United Kingdom) or closed countries (China) would be more particular with social balance rather social responsibilities. In effect, social influences of foreign firms to local traditions (especially on political or religious ideologies) are more important than socio-economic offerings. Another is that MNC are also applying niche marketing especially when they are catering to high-end markets. This can dilute explanations such as MNC’ inherent attribute for complex processes, economies of scale, larger market base and incentives to advertising.
Further, political structures of the host country can impede or support foreign firms. When the former are under capitalist economy, MNC would not be able to compete and gain markets as their pre-access contract have provisions for evasion in favor of state-owned companies. In effect, their inherent attributes would also be non-operational. In addition, small firms can be competitive in industries where their home country holds comparative advantage. For example, France is known for quality wines where a local manufacturer can export its products with the French brand and profit due to both domestic and commercial conventions. The impracticality of marketing to its scale does not connote business failure since this is supplanted by worldwide distinction. Lastly, the free-flowing of goods as well as foreign direct investments in-and-out of a country would terminate the intrinsic advantages of MNC. Economies of scale and price competitiveness can be disrupted through dumping practices and distributor’s price discrimination while trade secrets can leak due to insider job of an employee from the host country.
Credit:ivythesis.typepad.com
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