Essays on Europe 1992: Economic integration, multinationals and the pharmaceutical industry.

Abstract

In this dissertation, we analyze in three essays some of the issues involved in the interaction between economic integration ad multinational enterprises. In a first essay, we have used a formal model to investigate to what extent multinationals and economic integration are substitutes or complements. Economic integration is defined as the liberalization of factor movements in a situation where free trade already exists. Multinationals in our model produce a product in two production stages with different factor intensities. The multinationals can exploit differences in factor endowments and factor prices by locating the two stages in different countries. Our intuition is that multinationals and factor migration are substitutes, just like trade in goods and factor migration. To a certain extent that intuition is correct, but we provide a counter example where the two are complements. Factor migration can bring multinationals into existence although it reduces the differences between countries in factor endowments. Our subsequent analysis shows however, that one of the basic assumptions of the model of the first essay does not hold for the European Community. The EC does not start from a situation of free trade in goods, and there exist considerable price differences between Member States. The pharmaceutical industry shows us that national markets are still very much segmented and it is unlikely that the Europe 1992 program will change that completely for this industry. In our final essay, we have looked at one specific measure of the Europe 1992 program for the pharmaceutical industry: extension of the patent life for drugs. Once again, the analysis, using the event study methodology, shows that there can be a wide gap between policy objectives and policy effects. Just as the attempts at harmonization have failed to create an integrated market for pharmaceutical products, it is not certain that patent term extensions, as proposed by the EC, will increase innovation because of the expected increase in generic entry.