User:Themillofkeytone/Sandbox

V.	International Market The medical technology markets in most countries have been affected by recent waves of globalization. Although statistics on imports and exports of medical technology are difficult to evaluate and statistics on research expenditures are hard to find, economists have started to explore the issues that cause the markets in various countries to be affected by globalization. Globalization, along with changes in policies across different countries, has contributed to disparities in the development of technologies between the US, the EU and developing countries. In order to understand the source of these disparities, we must understand the globalization process along with the policy changes that have come in globalization’s wake. a. Globalization Globalization has had an impact on every aspect of society: politics, economics, science and culture. It encompasses a range of topics, from immigration and trade, to foreign direct investment and information distribution. The effects of globalization vary across countries. Some countries benefit while others lose, and often times there are mixed effects among the different sectors of a particular country’s economy. Despite these mixed effects, global trade is increasing, with 20% of world output currently being traded (Huynen, 2005) from its country of origin. In the last twenty years, a new wave of globalization has spread across the world. After the World Trade Organization formed in 1994, trade agreements across countries were successfully implemented. In addition, membership in the WTO as well as other trade organizations has grown. The WTO currently has 149 members. The scope of trade regulation has also expanded. New trade agreements have had a significant effect on the health care sector. The Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement together with the Sanitary and Phytosanitary Measures Agreement (SPM) and the Subsidies and Countervailing Measures Agreement (SCM) have had profound effects on the health care sector. TRIPS established minimum universal standards for intellectual property and patent protection, such as 20 years for pharmaceuticals. The TRIPS agreement has special significance for the health care industry because it prevents industrialized countries from exporting generic drugs to developing countries (Schaffer and Brenner, 2004). SPM establishes minimum international quality standards across countries that may be superseded by higher standards if a particular country has sufficient scientific foundation for stricter policies. The SPC regulates the level of subsidies a government can give to an industry. This agreement is designed to prevent unfair competition as a result of subsidies in markets. The large power that the WTO wields in today’s global market comes from the success of the WTO in enforcing trade agreements, the WTO’s large membership base and continued new trade agreements. This power has caused a multilateral push for deregulation, privatization and decentralization of health care and related services. b. Free Trade and the Technology Market Overall, the total world amount of medical technology imports and exports has increased from $130 to $360 billion (US) from 1993 to 2003 (Demeril et. al, 2006). However, the effects of free trade vary from country to country. Markets within different countries change in response to trade agreements but also in response to changes within markets of other countries. i. Changes in Response to Policy The medical technology sector can change in direct response to policy changes adopted due to new trade regulations. This could include deregulation in policy or newly instituted global product standards. In Turkey, policy changes adapted after 1970 have had significant effects on the medical technology import/export industry. In the 1980s, Turkey privatized their health care sector in an effort to comply with the WTO agreements. Since then, Turkey has made other changes to comply with the TRIPS agreements and other regulation set forth by the WTO. For instance, cuts were made in public incentives (probably in compliance to the WTO agreements) for domestic production of medical technology, which reduced domestic pharmaceutical production. In 1985, domestic pharmaceutical production in Turkey was able to fulfill 95% of the country’s demand, but in 2002 domestic pharmaceutical production only produced 71% of pharmaceutical supplies needed to meet domestic demand. The market share of foreign drug firms in Turkey was 36% in the early 1980s, rose to 51% in 1998 and has reached 65% in recent years (Demeril et. al 2006). ii. Response to Industry Changes Two out of the three main producers of traditional surgical instruments (mostly located in Western Europe) that existed in the early twentieth century are no longer significant players in the field. In their place, producers in Eastern Europe and Asia have arisen. This shift in industry location is primarily due to increased linkages across countries, usually in the form of outsourcing. Much research has been done on the benefits of external and internal linkages across countries. Schmitz and Garfoli are among many who have contributed to the literature in this area. The following example illustrates the effects changes within an industry can have on the medical technology sectors of multiple countries. Starting in 1972, firms in Tuttlingen, Germany started to outsource part of their production to developing countries, such as Malaysia and Pakistan, where labor was cheaper. Initially, because of poor product quality concerns, the firms in developing countries were responsible for the intermediate and relatively labor intensive tasks of grinding, filing, and polishing. Meanwhile, firms in Germany were responsible for the final processes of further polishing, cleaning, and packaging, as well as supplying critical input and the high quality stainless steel forgings. Later, with improvement in technology in Sialkot during the 1980s and 1990s, job forging on pre-forged German instruments was replaced by OEM productions. As a result, exports of pre-forged job-processed instruments from Sialkot, which peaked at US$3.4 million in 1993 had declined to US$2.9 million by the year 2000. (Statisticsches Landesamt Baden-Wurttemberg, 2001) Figure 4 below shows the general increase in imports from Malaysia, Pakistan, Poland, and Hungary to Germany from 1988 to 2001. Figure 4.

During these years, the industry in Tuttlingen underwent some major changes in response to the use of outsourcing. In the last decade, many small companies in the Medical Technology industry have transformed into specialist trader companies after being pushed out of production because of the cheap imports from the developing countries. In addition, three of the five largest traders in Tuttlingen are now either wholly or partially foreign owned. (Halder & Nadvi 2005) c. Research and Development Across Countries There is a lack of straightforward statistics on research expenditures across countries on medical technology, unless you look at the pharmaceutical industry. Governmental spending in all of Europe on medical technology research is only around US$3 billion (Cowen, 2006), a fraction of what the United States spends. However, this number isn’t very reliable. Because of the lack of straightforward reliable numbers, though, we will focus more on what leads to the disparities on new product development, rather than on the disparities themselves. The ability of a firm to absorb research and development into the medical technology industry depends on a number of issues, most of which have been well documented. Cohen and Levinthal (1980, 1990) introduce the concept of “absorptive capacity” and argue that a firm’s ability to apply university research for its own commercial gain is a function of its own investment. Cockburn and Henderson (1998) build on this notion, but add the degree to which firms are “connected” to universities is also important for utilizing knowledge spillovers. Lim (2000) restructures these two concepts and argues that absorptive capacity of firms is primarily a function of its connectedness, of which its investment in in-house R&D is just one of several components. The literature expands on this topic examining more specific relationships which occur between the industry and research. i. Differences Between the United States and Developing Countries The idea of ‘absorptive capacity’ can be applied on the national level. Developing countries, which lack both financial resources and human capital, perform very little of medical research. While countries like the US the EU are rich in both. For example, medical technology exports (MTE) from the US reached $44 billion 2003, which was greater than the total amount of all developing countries. In fact, the developing countries share of total global MTE was only 11.2% in 2003, while it comprised 36.5% of the world total exports. Furthermore, the total export/import ratio in developing countries was 104.3%. The MTE/MTI ratio was 54.9% in 2003 for developing countries. Turkey was far behind the overall mean value of MTE having a MTE/MTI of 8.8%. This is partly because only five developing countries (China, Singapore, Mexico, Hong Kong, and India) share 57% of the total MTE among the developing countries, which superficially inflates the overall average for developing countries (Demeril et. al 2006). ii. Differences Between the United States and the European Union While the differences in the medical technology industry indicators may be easily explained because of the obvious lack of human capital and financial capital, the differences in medical expenditures between the US and the EU can be attributed to more specific factors. One of these factors is the much larger presence of capital venture firms in the US compared to Europe. Capital venture industries step in when university scientists want to translate their research into a product to sell on the market. While countries in Europe tend to use bank loans as the main source of their funding, much of the funding in the US comes from these capital venture firms. Additionally, there are other advantages that capital venture firms offer besides the financial support, which banks do not offer. Capital venture industries often offer management services and connections to already established companies. These can ensure that the new company manages costs efficiently and may provide cheaper solutions for obtaining equipment and advertising. The faster growth of new medical technology companies in the US can be attributed in part to these capital venture firms. Other important differences exist between the US and EU, such as the amt. of significant borders in EU, which reduces the potential consumer base significantly. The SPM agreement, along with the Trade Barriers agreement, works to standardize quality standards and reduce those problems. d. Summary There are obvious discrepancies in how globalization has affected the medical technology markets in various countries. The US is still the largest exporter of medical technology with Europe and developing countries trailing behind. In recent years, the majority of countries have seen increases in medical technology exports, but the rankings between countries remains the same. More statistical information is needed in order to evaluate the current situation, but the information available does indicate reasons for disparity, and may suggest possible ways to change the current trend if need be.