The demand for pharmaceutical products is growing rapidly in Russia (20% annual

Question

The demand for pharmaceutical products is growing rapidly in Russia (20% annual increase in the past few years.) Currently, a large proportion of medicines in Russia are imports (75% in terms of value and 25% in terms of volume). A publication in 2014, the 2020 Pharmaceutical Development Program, aims to ensure that at least 50% of pharmaceuticals sales (in terms of value) in Russia originate from home, and Vladimir Putin has reportedly pledged almost $4 billion to support the domestic pharmaceutical industry. Putin set a target for the local industry to be producing 90% of the country essential medicines and he warned that multinational drug makers will face restrictions in the country if they fail to develop production facilities and transfer technology there.  RossRx is considering the choice between export vs. FDI to Russia. How would your advice to the company would be affected by the following factors:

a. RossRx is switching its product portfolio from high-end brand-name drugs to low end generics

b. Russia is expected to join WTO in the near future

c. The foreign exchange market is expected to be highly volatile in the next few years

Explanation / Answer

It is better to do FDI in Russia by RossRx because low end generics don’t require much investment in establishing of its manufacturing set up and also there is less chance of sharing of company specific technology. Generic products have more or less same technology that can be used by different companies. There will be less risk if Russia put ban on specific medicines as generics can be used widely and has more shelf life. It is better to export the product into Russia because companies is known for developing high –end brand name which offers good margin to the company. With Russia joining the WTO, makes him follow the international trade norms and company can negotiate with him on export terms. The company can now bargain on different terms and is not liable to any personal rules imposed by the country. In case of any dispute, the company has a authority to use international arbitration court to solve the matter. It is better to do FDI in Russia by RossRx because with the fluctuation in foreign exchange market it may be more costly for company to produce and then export to Russia as it involves a lot of transaction where company loses money because of volatility in foreign exchange. While doing FDI, the company can produce the product local and can sell the same in local market hence mush lesser impact due to foreign exchange fluctuations.

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