The XYZ Group, a supplier of pharmaceutical equipment, systems and services, has its head office in London and primary production facilities in the US. The company also has a successful subsidiary in South Africa, which was established in 1990. XYZ South Africa does not carry out primary production of pharmaceuticals; rather, it makes up products from imported primary materials – and packages and distributes these products. XYZ South Africa buys its primary materials from its UK parent and sells its products not only to the large South African market (which absorbs 6% of all the pharmaceuticals sold by XYZ), but also to the rest of Africa.
The XYZ Group is now considering a proposal to expand the activities of its South African subsidiary into primary production of pharmaceuticals, particularly in anti-retroviral drugs, which slow down the production of HIV and give the body a chance to build up its CD4 or "white blood" cells, crucial to fighting Aids.
At a recent conference organised by the World Health Organization, on the needs of HIV/AIDS sufferers in Africa, several proprietary drugs were identified to be particularly effective in combating HIV, of which the most effective is PAP-10, produced by XYZ.
Since its emergence over two decades ago, AIDS has gone from being the scourge of relatively select groups, such as homosexuals and intravenous-drug users in rich countries, to arguably the biggest threat to life and prosperity in the developing world. In its annual report on the AIDS epidemic, UNAIDS – the United Nations agency monitoring AIDS – estimates that a shocking 40 million people are infected with HIV, including 2.5 million children.
In 2003 alone, 5 million people were newly infected. South Africa alone has 5 million AIDS/HIV sufferers, comprising one in nine of the country’s population – making it the country with the highest rate of infection in the world. AIDS/HIV is South Africa’s biggest social, economic and political problem. An estimated 600 to 1,000 people die each day from the disease. By 2001, 360,000 adults and children had died from AIDS-related causes, resulting in 660,000 children orphaned by AIDS in 2001.
In the Soweto township of South Africa, experts fear there will be 25,000 AIDS orphans in two years' time. The vast majority of South Africans cannot afford the expensive anti-retroviral drugs, as more than 10% of the population lives on less than US$0.50 cents per day. South Africa has a highly unequal distribution of income amon its population, with an average monthly salary of just US$100.
Compare that to the current price of one day’s supply of PAP-10, which is equivalent to US$30. At these prices, most of South Africa’s AIDS/HIV victims are not able to afford the drug.
A generic equivalent to PAP-10, if one were available, would cost only a fraction of the amount charged for the proprietary drug. The South African government, has a mixed record in this area, but is gradually moving towards respect of intellectual property rights, partly under pressure from multinationals, the World Trade Organization and the US, partly in the hope of fostering a secure environment for research-based investment in pharmaceuticals.
Anxious to make medical services and drugs available to South Africa’s poor, the South African Ministry of Health has encouraged local production of the drugs. However, South Africa’s dire economic situation (falling exports, a Rand under pressure, the financial sector in crisis) has led to radical cuts in public spending – and leaves the government’s hands tied.
The South African government, through its Ministry of Health, has asked XYZ South Africa to supply the anti-retroviral drug, PAP-10. It has also been invited to consider local production of PAP-10. XYZ South Africa, however, is not in a position to make an investment decision of this magnitude without consulting XYZ UK.
An investment decision by XYZ South Africa is complicated by the politics of poverty and inequality, as well as the usual considerations of costs and benefits arising from foreign investment. Technology transfer, local employment issues, balance of payments, transfer pricing and monopoly profits are just some of the issues that the company will have to weigh. Moreover, the drug is patent-protected and XYZ is anxious to make the maximum possible worldwide profits from its successful drug to meet the ever-increasing costs of research and development.
YOUR TASK:
The CEO of XYZ PLC in the UK has called a board meeting to consider proposals to undertake further foreign direct investment in South Africa. He is very much aware of the conflict of interests presented by the proposed investment – XYZ South Africa obviously has interests that overlap with those of its parent company, particularly in relation to profits; XYZ South Africa, however, also has an interest in the expansion of its own local activities, which XYZ UK, looking at matters more globally, may not share. XYZ South Africa, therefore, may well find itself tacitly allied with, say, the South African government, in pressing for more local investment.
You are the assistant to the CEO and he has asked you to prepare a brief for him that will cover the key issues involved in this decision. It is therefore expected that your recommendations will be based on a meticulous treatment of both ethical and commercial interests involved in this investment decision.
GUIDE TO THE ASSESSMENT TASK:
Although you are free to adopt any approach you like based on the enormous resources that are available on foreign direct investment (FDI), the AIDS crisis, the South African economy and pharmaceutical companies, you are advised to address the following issues when preparing your report:
• The key areas of stakeholder conflict in this FDI decision.
• The main issues facing XYZ and the South African government.
• Whether drugs should be viewed like any other globally marketable product, in terms of pricing and profitability decisions.
• The extent to which traditional FDI theories help explain an investment decision beset with moral issues.