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China's Comparative Advantage in Drug Innovation
Imagine a large centralized nation with a desire to create new intellectual property, rising research universities, and a willingness to try out risky new products with minimal “human subjects” concerns (academics imagine if there was no IRB approval needed for research). There is such a country and it called China and it is likely to become the new center of drugs research. The WSJ reported on some of the recent news in this piece. This general issue raises some interesting economics questions.
China's market size means that there is a large enough domestic market to sell to if Chinese drug companies dream up a new product. This creates incentives to invest costly irreversible R&D. See Acemoglu and Linn 2004. China's growing economy and subsidies for research universities will lure academics to work on these problems. Industrial parks close to these universities will help their nerds to commercialize their discoveries. The ability to recruit “guinea pigs” to take the experimental drugs in large clinical trials will allow China to fast track new drugs in ways that the U.S with its smaller population and its large population of torts lawyers could never achieve.
So, the U.S liability law's toughness is likely to have the unintended consequence of leading to a transition of cutting edge innovation to move from the U.S to China. Can U.S scientists gain from piggybacking on China's innovations? This will depend on international patent protection versus open source technology agreements and collaboration. Read Josh Lerner's stuff on this topic.
Source: http://greeneconomics.blogspot.com/2015/04/chinas-comparative-advantage-in-drug.html
