1.3 Recent FDI trends in medical goods and services

company—has different concerns and is driven by often divergent objectives and problems. The complexity and opacity of health care delivery is another critical factor. Uniquely to the health care industry, the consumer, or patient, has a limited say in the choice of a product or service. Instead, the multiplicity of regulations, the number of parties involved, and the high expertise required all mean that decision-making is widely dispersed. In addition, products and services in the health care value chain are highly customized to perfectly match needs, making it almost impossible to plan their efficient supply on a large scale.

The supply of health care often starts with hospitals and clinics, where private sector participation (measured as the share of private hospitals) varies considerably across countries—ranging from close to zero in Nordic countries to over 80 percent in Japan, the Netherlands, and the United States (OECD 2020). This variation is not linked to income level or stage of development: lower-middle-income countries like the Lao People’s Democratic Republic, Myanmar, and Vietnam closely follow the Nordic countries with less than 15 percent private sector participation, whereas Cambodia, India, and Indonesia fall at the other end of the spectrum with Japan and the United States. It is also important to note that medical services are often subject to stringent regulation and limited foreign capital participation.

The manufacturing and distribution of goods and technology is dominated by private firms, especially multinational corporations (MNCs), as discussed in box 1.3. Both the pharmaceutical and medical device segments are highly capital and innovation intensive and face a highly regulated environment requiring extensive data collection and information exchange. Products often have high profit margins and are sold

Box 1.3 Recent FDI trends in medical goods and services

The health sector’s share of global greenfield foreign direct investment (FDI) flows has been growing but remains small. Greenfield FDI in the sector has been volatile, fluctuating between US$10 billion and US$25 billion between 2003 and 2020 (figure B1.3.1). But its share in the total increased from 1.9 percent to 3.2 percent. Within the sector, the composition of greenfield FDI value has shifted from pharmaceuticals—by far the largest segment in 2003, with a 71 percent share—to biotechnology, whose share rose to 43 percent by 2020 (figure B1.3.1).

Almost all the greenfield FDI in the sector originates from high-income countries (mainly Germany, Switzerland, and the United States) and flows primarily to high-income countries as well (figure B1.3.2). Upper-middle-income countries also received a significant share while increasing their outward investments in high-income countries.

Typically for an innovation-driven industry, greenfield FDI in medical goods focuses on research and developmen (R&D). From 2003 through 2020, 20–30 percent of greenfield FDI in biotechnology, pharmaceuticals, and medical devices was invested in R&D activities (figure B1.3.3). The R&D intensity of greenfield FDI was about 10 times the level in the rest of the economy, which was 2.9 percent. Top multinational corporations in pharmaceuticals and medical devices usually spend 10–30 percent of their annual sales on R&D. Manufacturing remains the primary activity in medical goods, absorbing 60 percent of greenfield FDI.a

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