Research Policy 32 (2003) 1865–1879

Institutional frameworks and innovation in the

German and UK pharmaceutical industry
Steven Casper a , Catherine Matraves b,c,∗
a Judge Institute of Management Studies, University of Cambridge, Cambridge CB2 1AG, UK
b Department of Management, Michigan State University, East Lansing, MI 48824, USA
c Department of Economics and Management, Albion College, Albion, MI 49224, USA

Received 25 April 2002; received in revised form 11 February 2003; accepted 3 April 2003

Abstract
This paper analyzes how governance structures impact the innovation capabilities of leading German and UK firms in
the pharmaceutical industry. Our main objective is to show how variation in national institutional frameworks influences
the innovation process, and thus, relative performance. There are two main conclusions. First, the corporate governance
structure allowed leading UK firms to more quickly adapt than German firms to rapidly changing external environmental
conditions in the global pharmaceutical industry. Secondly, leading UK firms have an advantage in generating innovative
drugs (“blockbusters”) than do German firms due to the nature of the institutional framework in which they are embedded.
© 2003 Elsevier Science B.V. All rights reserved.
JEL classification: L65; O32

Keywords: Institutional frameworks; Innovation; Pharmaceuticals

1. Introduction seem less able to successfully innovate in these

The interesting question of how nations and firms
organize their innovation process, and the resulting
impact on product market strategies and performance
has become increasingly important in recent years.
Manufacturing and commercial activity is not spread
evenly across nations (Porter, 1990). It has been ex-
tensively argued that firms in the US and UK, for
example have tended to excel in high-technology in-
dustries where the pace of innovation is very rapid
and technological paradigms are shifting (Hall and
Soskice, 2001). German firms, on the other hand,
∗ Corresponding author. Tel: +1-517-629-0315;
fax: +1-517-629-0428.
E-mail address: cmatraves@albion.edu (C. Matraves).
high-technology fields, but are instead very successful
in established science-based industries such as indus-
trial chemicals, as well as a number of high-quality
manufacturing sectors such as machine-tools (Streeck,
1992; Katzenstein, 1989). An emerging literature ex-
plains cross-national variation in firm characteristics
and their product market strategies as the result of dif-
ferences in national institutional frameworks (Aoki,
1990; Hollingsworth, 1997; Soskice, 1994, 1999).
While the existing literature has focused on a rather
more aggregate picture, relatively little work has been
undertaken to date at the microlevel.
This paper has two main objectives. First, focusing
on corporate governance, we analyze the impact of na-
tional institutional frameworks on the innovative capa-
bility of the pharmaceutical industry in Germany and

0048-7333/$ – see front matter © 2003 Elsevier Science B.V. All rights reserved.
doi:10.1016/S0048-7333(03)00082-9
1866 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
the UK, respectively. In part because the generation of
Research and Development (R&D) remains relatively
national (Patel, 1995), we argue that leading firms’
competencies will remain influenced by national in-
stitutional frameworks. The way in which firms create
governance structures is therefore associated with the
innovation strategies adopted.
Second, by moving to the microlevel, this in-
dustry study complements and reinforces existing
research examining the competitiveness of countries
such as Germany characterized by “coordinated”
or “stakeholder” patterns of economic organization.
While German firms remain competitive in a range
of science-based industries with cumulative or incre-
mental innovation trajectories, corporate governance
institutions in Germany have not facilitated adaptive-
ness in radically innovative industries such as the
pharmaceutical industry. However, important changes
to the German model of corporate governance have
recently begun to occur, partly due to a widely per-
ceived loss of competitiveness in many science-based
industries (Vitols, 2002).
The importance of the pharmaceutical industry lays
not so much in its absolute size, but rather in that
it is one of the few high-technology, and typically
not government subsidized, industries where European
firms have historically been successful at the global
level (Sharp and Patel, 1996). The pharmaceutical in-
dustry is also an interesting industry to analyze be-
cause it has recently been subject to various dynamic
shocks. These shocks include a rapidly changing sci-
entific base, increases in the cost of innovation (the
average cost of developing a new drug), changes in
marketing techniques, and a shifting R&D focus on
chronic rather than acute illnesses due to rapidly aging
populations (Matraves, 1999). The pharmaceutical in-
dustry affords a deeper analysis of complex industry
dynamics, allowing us to trace how exogenous struc-
tural changes feed into the competitive process to con-
strain firm strategy.
The comparative analysis of corporate governance
institutions is used to provide an explanation for
why German firms experienced a relative decline in
their performance from the 1980s to the 1990s. The
evidence shows that UK firms substantially outper-
formed their German rivals in their adjustment to the
changing industry dynamics. UK firms not only main-
tained their innovation capability, but also developed
a variety of internal company organizational struc-
tures and alliances with entrepreneurial start-up firms.
This, in turn, allowed the rapid creation of competen-
cies in biotechnology and other new research areas,
as well as the rationalization of research decisions
within the firm. On the other hand, German firms es-
sentially tended rather more, and until very recently,
to maintain and in some cases, strengthen competen-
cies in traditional research methods based on organic
chemistry.
In Section 2, we characterize the major structural
changes that have taken place in the pharmaceutical
industry during the past two decades. Typical patterns
of German and UK firm organization are then de-
scribed. It is explained how the national institutional
frameworks may play a role in aiding firms, or not, to
quickly adapt to new competitive conditions.
In Section 3, we provide a combination of descrip-
tive performance statistics and firm-level evidence
that is shown to be consistent with the arguments
developed. Our analysis highlights the importance
of creating capabilities in the new drug discovery
methodology and maintaining a strong drug pipeline,
in combination with the effective global exploita-
tion of new drugs. In other words, how the internal
resources of the firm are leveraged in response to
the external market dynamics determines R&D and
advertising expenditure, the product line, and ulti-
mately, performance. Moreover, the internal resources
that the firm possesses partly depend on the national
framework in which it is embedded.
Finally, Section 4 summarizes our results, discusses
the role of alternative explanatory variables within the
institutional framework that might also be expected to
have some impact on relative firm performance (see
Thomas (1994); Gambardella et al., 2000), and con-
cludes.
2. Industry dynamics, firm organization and
innovation
Since the end of the 1970s, pharmaceutical industry
dynamics have become more complex, mainly due to
radical changes in the nature of the innovation process,
the focus on chronic rather than acute illnesses as pop-
ulations age, new marketing techniques, and changes
in the regulatory environment (Henderson et al., 1999;
 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
Matraves, 1999). These changes have caused major
shifts in firm strategy in order to be able to compete
effectively on a global scale. This leads us naturally
into a discussion of how the nation-specific institu-
tional framework has allowed UK firms to adjust more
rapidly than German firms to the new industry envi-
ronment. In particular, while recognizing the impor-
tance of the regulatory system and national systems of
innovation (Thomas, 1994; Gambardella et al., 2000),
we focus on how differences in ownership composi-
tion, corporate governance laws and the structure of
labor markets have led to the creation of different pat-
terns of firm organization. In Section 2.1, structural
exogenous changes within the pharmaceutical indus-
try are discussed. Section 2.2 analyzes the variation in
the national institutional frameworks, integrating these
structural changes to generate expectations with re-
spect to the relative performance of German and UK
firms in the 1990s.
2.1. Pharmaceutical industry dynamics
2.1.1. The innovation process
Traditional research methodologies, prevalent in
the 1950s and 1960s, screened thousands of chem-
ical compounds for efficacy against a given disease
(Schwartzman, 1976), i.e. the so-called ‘random drug
design’. In the 1970s, basic biomedical knowledge
increased, leading to ‘rational drug design’, i.e. the
development of more precise models of how partic-
ular diseases function, and the design of molecules
designed to target particular cells or cause particular
biological interactions within the body (Powell, 1996;
Henderson et al., 1999; Gambardella et al., 2000).
Since the early 1980s, biotechnological research tech-
niques have been displacing traditional ‘chemical’
capabilities.
When a new research methodology is introduced,
organizational rigidity and inertia may hinder the
incumbents’ ability to exploit it (Henderson and
Cockburn, 1996).1 Radical innovations in biotech-
nology have created strong incentives for new entry,
1 Henderson (1994) argues that random drug design required
relatively little communication of knowledge (inter- or intra). Ra-
tional drug design, on the other hand, implies scientists must be
skilled in many disciplines, which may be quickly advancing,
which has greatly increased the need for the exchange of both
inter- and intra-firm knowledge.
1867
where interestingly, much research is taking place
in start-ups rather than in large pharmaceutical firms
(Powell, 1996). Developing research collaborations
with biotech start-ups helps diversify the pharma-
ceutical firm’s portfolio across a number of research
areas.2 In the pharmaceutical industry, research in
complex disease areas usually takes place along a
number of distinct research trajectories (Matraves,
1999). For example Penan (1996) identifies 15 dis-
tinct research programs to fight Alzheimer’s, each
of which is supported by a different constellation of
university departments, large pharmaceutical firms,
and in some cases, biotech firms.
Having access to new competencies in drug design,
disease modeling, and screening is therefore critical
for competitive success (Zucker and Darby, 1997),
where internal scientific capabilities remain necessary
for knowledge exploitation (Cockburn and Henderson,
1996). Firms may have an incentive to broaden their
R&D activities across a larger number of therapeutic
areas, as each therapeutic area becomes a platform
from which the firm can monitor the field, buy in
promising compounds from third parties, develop
collaborative research projects with universities, or
start in-house research.3 Thus, large pharmaceuti-
cal firms are the integrating knowledge mechanism,
as well as providing the necessary complementary
assets such as clinical development, dealing with
regulatory authorities, and marketing (Gambardella
et al., 2000).
2.1.2. Marketing networks
Historically, marketing was dominated by the labor
intensive practice of sending thousands of ‘detailers’
to visit individual doctors, as well as some advertising
2 It is estimated that only 1 compound from an initial 5,000 will
be successfully developed (PhRMA, 1997). If in-house research
in one therapeutic area is unsuccessful, purchasing compounds
developed by third parties can help to fill gaps in the development
pipeline.
3 Given the increase in the cost of innovation—US$ 802 million
today (PhRMA, 2002), up from US$ 350 million in the mid 1990s
(Pisano and Wheelwright, 1995)—it may be that only the largest
firms will cover several therapeutic areas. Henderson and Cockburn
(1996) assert that firms typically invest in approximately 10–15
distinct research programs, where each one is targeted towards a
particular disease area. Investigating the relation between firm size
and research productivity, they show that larger firms are more
productive, mainly due to economies of scope.
1868 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
in medical journals. However, recent pressures to
increase the returns on individual drugs and the
shortened product life cycle, have prompted new
distribution and marketing strategies. Redeveloping
prescription drugs into ‘over the counter’ (OTC) ver-
sions is perhaps the simplest way to extend the life of
a compound. This requires direct to consumer adver-
tising, as well as the development of new distribution
channels, where such competencies differ dramati-
cally from the more traditional detailing (McGahan,
1994).
2.1.3. Government regulation
Although the pharmaceutical industry remains very
highly regulated, there have been important move-
ments towards increased international market har-
monization. In the EU, due to the Single European
Market legislation, the European Medicines Evalu-
ation Agency (EMEA) has recommended biotech-
nology and other “high tech” drugs for EU-wide
circulation, reported any adverse reactions, and coor-
dinated inspections since 1 January 1995. For other
products (using non-leading-edge technologies), ap-
plication to the EMEA is optional, where firms that
supply the local market only negotiate with national
agencies. Thus, the EMEA has the power to cen-
trally approve medicines, with one single license.
Also, the International Conference on Harmonization
(ICH) was set up in 1990 to bring together regula-
tory authorities and drug developers from the major
domestic markets of the US, the EU and Japan to
attempt to internationally harmonize regulatory pro-
cedures. Finally, the Pharmaceutical Mutual Recog-
nition Agreement, signed by the US and the EU in
1997, has eliminated some regulatory barriers such
as inspections of manufacturing facilities (which had
increased costs and caused delays in availability).
In terms of price intervention, the common mount-
ing governmental concern over increasing healthcare
costs is having a negative impact on pharmaceutical
prices, via reducing reimbursement rates and increas-
ing the ‘limited lists’ (Matraves, 1999). In the US,
there is very little direct price intervention; in the EU
and Japan, on the other hand, where there is a high de-
gree of public procurement, there is substantial price
intervention of one form or another. Within Europe,
even with the implementation of the Single European
Market, there remains significant variation in price for-
mation and the reimbursement of medicinal products
across member states, and thus, the single market re-
mains distorted in pharmaceuticals.4
To summarize this section, the changing research
methodologies, and the necessity of exploiting a new
drug globally in order to recover the substantial in-
crease in average R&D costs, which is partly driven
by the increasing costs of regulatory compliance, have
had an important impact on competition in the phar-
maceutical industry. Innovators must develop in-house
and/or external competencies in order to discover new
drugs and expand their research across more therapeu-
tic areas. Given these structural changes, would we
expect German and UK firms to react differently, with
varying degrees of success? To answer this question,
we look at observed variations in the German–UK in-
stitutional frameworks.
2.2. Institutional frameworks and innovative
capability
Our theoretical approach seeks institutional expla-
nations of why incentive structures to undertake inno-
vation differ across nations. The main notion is that the
technologies needed to innovate rarely consist of spe-
cialized machines or modifiable knowledge that can
be transferred to any organization regardless of the in-
stitutional environment, and simply be ‘switched on’.
Rather, most technologies or innovative capabilities
are dispersed across highly skilled experts embedded
within complex organizational structures, commonly
called ‘governance structures’ (Williamson, 1985).5
Interestingly, there may exist systematic differences in
the governance structures developed, which affect the
relative cost of building an innovative capability. We
focus primarily on corporate governance institutions
and consider German–UK variation.6
4 Within the EU, the UK National Health Service is a tax fi-
nanced system as compared to a premium financed (social insur-
ance) system as in Germany, implying more of a supply oriented
service package (EFPIA).
5 Innovative capacity usually consists of tacit knowledge spread
over networks of managers, scientists and skilled workers acting
within an institutionally structured environment (often encompass-
ing several firms, or in science based industries, firms and public
research institutes).
6 Gedajlovic and Shapiro (1998) provide an excellent summary
of the literature on cross-national variation in corporate governance,
and its consequent impact on profitability.
 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
The UK is best characterized as a “liberal market
economy” (Hall and Soskice, 2001). Firm organization
depends primarily on market transactions and the use
of a flexible, enabling private legal system to facilitate
a variety of complex contracting situations. As courts
generally refuse to adjudicate incomplete contracts,
market participants need to specify control rights as
fully as possible, or when this is not possible, to use
extremely high-powered performance incentives to
align interests within and across organizations. In other
words, national institutional frameworks promote an
incentive contracting model of corporate governance.
In contrast, Germany is best characterized as a “co-
ordinated market economy”, underpinned by a regu-
latory private law system (Soskice, 1994). Firms are
embedded within networks of trade and industry asso-
ciations, as well as a similar, often legally mandated,
organization of labor and other interest organizations
(Katzenstein, 1987, 1989). Firms engage these asso-
ciations to solve a variety of incomplete contracting
dilemmas and create important non-market collective
goods, such as the apprenticeship system. To discour-
age individual firms from exiting the collective system,
German public policy uses private law to regulate a
wide variety of inter-firm and labor contracts as well
as to create neo-corporatist bargaining environments
through the delegation of issue-area specific bargain-
ing rights to unions and other stakeholders within
firms.
We now examine more specifically how particular
aspects of these institutions influence the creation of
viable organizational competencies needed for radical
innovation. In other words, systematic differences in
relationships between firms and owners/investors, and
career organization can be linked to patterns of inno-
vation.
2.2.1. Manager–owner relationships
Partly due to differences in company law, and partly
due to differences in ownership composition, there are
systematic differences in the constraints faced by UK
and German pharmaceutical firms. A key feature of the
UK system is that company law protects the rights of
dispersed shareholders by establishing an open market
for corporate control. This is in contrast to Germany,
where concentrated ownership combined with a so-
cial rather than purely financial ownership structure,
means that hostile takeovers, for example are virtu-
1869
ally unheard of.7 Many German–UK comparisons of
corporate governance thus focus on differences in the
ability of firms to obtain finance to make long-term
investments (Charkham, 1995).8 These constraints
create differences in how top management can be
expected to respond to market dynamics in turbulent
industries such as pharmaceuticals.
In the UK, although accounting law has increased
the transparency of annual reports and aimed to in-
crease the power of non-executive directors, the UK
corporate governance system is enabling in nature.9
It places few formal requirements on the structure
of the company board or its duties. In addition to
high-powered performance incentives, top manage-
ment is given powerful decision-making authority. The
CEO is given unilateral decision-making control over
major decisions; strategic initiatives are usually for-
mulated within committees of top managers, approved
by the CEO, and then quickly implemented through-
out the hierarchy.
In Germany, on the other hand, corporate gover-
nance institutions strongly conduce against the adop-
tion of an incentive approach to mitigating incomplete
7 The hostile takeover of Mannesmann by the UK firm, Voda-
fone, is a widely discussed departure from traditional German
practices. While this takeover has not heralded a major change
in the German market for corporate control—there have been no
other major hostile takeovers in the 2 years following—it has
prompted a wide-ranging debate over the future of German cor-
porate governance (Vitols, 2001).
8 In the UK (and the US), some analysts believe the preference
for short-term returns limits long-term investment strategies, as
top management is forced to focus on increasing reported earnings
in quarterly reports or to pay large yearly dividends, rather than
reinvest earnings. Therefore, if they are to make large R&D invest-
ments, management must find appropriate signals to send to owners
that there is a strong probability of future growth or earnings. In
the pharmaceutical industry, such signals exist. These include the
firm’s patent position, the drug “pipeline” (compounds in advanced
stages of clinical testing), as well as the firm’s R&D budget.
9 Non-executive directors are primarily responsible for crafting
appropriate governance structures for top management. Formal
roles include salaries and other performance incentives such as
share options, the selection and tenure of top management where
top management will be removed if performance lags, and interme-
diation during hostile or friendly take-over bids. Most large firms,
including all the large UK pharmaceutical firms, have created a sin-
gle board of directors, consisting of several non-executive directors
appointed to represent shareholders, as well as the chief executive
officer (CEO) and several other executive directors (Charkham,
1995).
1870 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
contracts. Rather, a number of legal provisions en-
courage owners to develop long-term, relational con-
tracts with investors. Company law promotes a stake-
holder system, in which various groups of employ-
ees in addition to owners are given a strong voice in
firm management (Charkham, 1995; Lehrer, 1997). A
“two tier” system is legally mandated, consisting of
a supervisory board (Aufsichtsrat) and an executive
board (Vorstand) of top managers. Power is dispersed
across various stakeholders on the supervisory board,
and most decisions are consensual.10 While members
of the Vorstand can be removed if performance is
severely sub-standard, they rarely receive the unilat-
eral decision-making control or high-powered remu-
neration incentives seen in UK firms.
The German stakeholder system is complemented
by a system of concentrated ownership (Kogut and
Walker, 2001). As most shares within large public
firms are directly held or controlled by banks and in-
surance companies with no short-term liquidity op-
tion, firms have access to ‘patient capital’ that may be
used to finance long-term investments.11 Banks and
other concentrated stakeholders therefore play an im-
portant role on German supervisory boards, primarily
through their strong support of the stakeholder sys-
tem, which is perhaps because it makes the patterns
of company decision-making predictable, rewarding
long-term planning and consensual decision-making.
2.2.2. Manager–employee relationships12
In the UK, labor markets are relatively dereg-
ulated, which makes implicit long-term contracts
10 Seats on the supervisory boards of large firms are equally di-
vided between firm employee representatives and owner represen-
tatives, with the tie-breaking vote held by the supervisory board
chair, also an owner representative.
11 While this holds true for the time period of our study, in
2001, the German government abolished traditionally high capital
gains taxes on long-term corporate shareholdings. This is expected
to weaken traditional German cross-shareholding practices and
increase the liquidity and importance of German stock markets.
As of 1996, however, market capitalization/GDP was 151% in the
UK but only 26% in Germany (Deutsche Bundesbank, 1997).
12 The generalizations on management–employee relations origi-
nate from a series of interviews conducted with high-level
managers within the finance and research divisions of three UK and
two German pharmaceutical firms during 1997. We cannot name
the firms or managers interviewed due to confidentiality agree-
ments. Lehrer (1997) analyzes internal firm organization in the UK
and German civil airline market, and comes to similar conclusions.
with low-powered performance incentives less viable
as a market exists for managers and technical em-
ployees. High wages form part of a wider incentive
structure to reward superior individual performance,
as well as bonuses and a variety of stock-option
plans.13 Additional incentives include the opportunity
for rapid promotion and the granting of unilateral
decision-making power to key employees (Lehrer,
1997; Vitols et al., 1997). Overall, these firm organi-
zational characteristics closely mirror the incentives
created by owners for top management. In UK phar-
maceutical firms, scientists and managers receive
short-term contracts with no long-term employment
guarantee, considerable scope for individual initia-
tive, and performance-related pay. Management may
quickly cut non-performing assets, replacing them
with new employees that are hired in the open labor
market or promoted from within.
In Germany, stakeholder norms create important
firm-level organizational differences in the structure
of decision-making, the career-paths of managers
and scientists, and remuneration (Lane, 1995). While
there exist no formal laws stipulating lifetime em-
ployment, labor has used its power on supervisory
boards as well as its formal consultative rights under
co-determination law over training, work organiza-
tion, and hiring, to demand unlimited employment
contracts. Over time, top management has acceded to
these demands to secure a cooperative labor force, to
lessen the risk of poaching, and to minimize the high
unemployment insurance costs that German labor law
forces firms to pay for laid-off workers. Once the life-
time employment norm was established, it spread to
virtually all mid-managers and technical employees.
Migration of managers or highly skilled technical
employees across firms is therefore limited.
Given these constraints, very different organiza-
tional structures were created than exist within UK
firms. German employees receive salaries defined by
their hierarchical position, with pay increases that
follow fixed trajectories based on seniority and pro-
motion. Bonuses are typically negotiated into stan-
dard contracts and are not performance related. Most
13 For example one of the large UK firms offered stock options to
over 3200 managers, including virtually all scientists and financial
managers. Firms also typically linked a large percentage of pay
(up to 1/3) to yearly performance reviews.
 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
Table 1
Characterization of the institutional framework in Germany and the UK
Germany
Labor law Regulative: coordinated wage bargaining; competition
clauses enforced; long-term employee careers
Company law Stakeholder system: two-tier board system;
co-determination rights for employees
Financial system Bank-based: close links to the stakeholder system of
corporate governance; no hostile market for corporate
control
employees begin careers in technical positions and
at later levels of their career enter into formal man-
agement positions; rapid promotion is rare.14 Thus,
the patterns of company organization emphasize the
creation of long-term contracts that reduce intra-firm
agency costs and create an incentive for employees to
invest in firm-specific skills.15
2.2.3. Corporate governance institutions and
firm-level adjustment
Table 1 summarizes the institutional patterns that
we identify that most affect the organization of firms
in technology based industries. Overall, our analysis
of large firm corporate governance institutions in the
UK and Germany point to different types of adjust-
ment capabilities. While our argument cannot capture
the micrologic of large scale technological change
within leading pharmaceutical firms (see Zucker and
14 This implies that firms can shed assets, but only through blunt
aggregate instruments, such as early retirement, or hiring cutbacks.
Once more narrow assets are created, they cannot be cut quickly,
e.g. a group of scientists with a specific research competency.
Moreover, consensual decision-making may lead to the inefficient
distribution of investment funds, as each group involved has an
effective veto-right. As unilateral decision making is limited, it
is difficult for firms to create strong performance incentives for
individual employees, e.g. stock options were illegal until 1998.
15 Employees holding specialized knowledge have little incentive
to ‘hold-up’ the firm, since outside labor market opportunities
are relatively scarce. Moreover, the firm has strong legal options
should a scientist, say, attempt to set up a start-up or move to
a rival. German courts are willing to uphold contractual clauses
that forbid an employee to take a job at a different firm with
the same skill classification for 1 year after leaving the original
firm. In addition, employers’ associations maintain tacit norms
and a monitoring capacity to prevent employee poaching, and in
so doing, lower the risks to large firms of training highly skilled
workers within nationally specified curricula.
1871
UK
Liberal: decentralized wage bargaining; competition
clauses struck down by courts; low barriers to
employee turnover
Shareholder system: minimal legal constraints on
company organization
Capital market system: close links to the market for
corporate control; financial ownership and control
of firms
Darby, 1997; Nightingale, 2000), it can usefully
explain cross-national differences in observed perfor-
mance. We expect that differences in the broad cor-
porate governance of UK and German firms should
strongly impact their relative ability to rapidly incor-
porate new drug discovery techniques associated with
biotechnology, as well as changed marketing and dis-
tribution capabilities as earlier described in Section 2.
In the UK, corporate governance institutions should
allow the easier creation of governance structures
within large firms that foster capabilities in radical
innovation, i.e. the development of “blockbusters”
(new drugs typically with sales in excess of a bil-
lion dollars). While shareholder value norms in the
UK often induce a short-term perspective by top
managers, this same system also provides extremely
strong incentives to these managers to quickly adjust
firm strategy when market or technological dynamics
within industries appear to change. Similarly, manage-
rial dynamics within large UK firms—high-powered
performance incentives, unilateral decision-making,
and few long-term employment guarantees—create a
capacity within the firm for top managers to quickly
make large-scale corporate reorganizations.
In Germany, on the other hand, much analysis has
pointed to the “long-termism” engendered by the
stakeholder system of corporate governance, a system
that implies long-term performance in industries with
relatively stable technological characteristics (Casper
et al., 1999). This system mutes pressure from own-
ers to make risky adjustments to rapidly changing
market conditions. Within large firms, lower-powered
performance incentives, consensual decision-making,
and long-term employment norms hinder the ability
of top managers to quickly reorganize internal hu-
man resource competencies when, as in the case of
1872 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
pharmaceuticals, core research and marketing com-
petencies rapidly change. Facing the major shifts in
the pharmaceutical industry over the last 20 years, we
expect then to observe a more sluggish performance
by German firms.
3. Firm-level evidence
This section presents a variety of evidence on the
relative performance of the UK and German pharma-
ceutical industry. Evidence to support our arguments
is provided first by looking at the speed by which UK
and German firms responded to the changing scien-
tific basis of the pharmaceutical industry during the
1980s. We examine the ability of UK and German
firms to restructure away from “chemical” and towards
“life-science” orientations, and where available, we
also examine more qualitative evidence on patterns
of managerial decision-making and adjustment within
German and UK pharmaceutical firms. Secondly, we
compare the relative success of UK firms and Ger-
man firms in the late 1980s and 1990s on various di-
mensions, such as R&D expenditure, the number of
blockbusters, and market share.
First, consider the speed by which UK and Ger-
man firms responded to the changing scientific base
of the pharmaceutical industry during the 1980s. As
competitive pressures have become more intense, UK
firms quickly shed assets in non-life-science related
chemical industries and, through a mix of mergers and
internal expansion programs, substantially increased
research and development capabilities in order to re-
spond effectively to new research opportunities. Thus,
in the UK, SmithKline Beckman (US) and Beecham
(UK) was the first major merger in the pharmaceutical
industry in recent times, with the merger taking place
in 1989. Zeneca was incorporated via an ICI spin-off in
June 1992. Zeneca (who became AstraZeneca in 1999)
focuses purely on ‘life-sciences’, i.e. pharmaceuticals
and agrochemicals. Glaxo and Wellcome (merged in
1995) are also both focused entirely on the pharma-
ceutical market. Finally, in 2001, Glaxo merged with
SmithKline Beecham to form the world’s largest phar-
maceutical company, spending in excess of US$ 3 bil-
lion a year on R&D.
While falling somewhat outside our theoretical anal-
ysis, an additional but complementary factor favor-
ing rapid adjustment in the UK was the existence of
a national system of innovation that fostered a sub-
stantial population of biotechnology start-ups, com-
plemented by leading edge biomedical research at a
number of UK universities (Senker, 1996). Thus, dur-
ing the 1980s, universities, financial actors, and the
government were able to quickly mimic key institu-
tions that already existed in the US that had led to the
creation of numerous biotechnology start-ups. While
the performance of the UK biotechnology sector has
lagged behind that in the US (Casper and Kettler,
2001), the UK has nevertheless emerged as the leading
European platform for biotechnology. The top man-
agement of UK pharmaceutical firms, given their abil-
ity to quickly shift the asset structure of their compa-
nies, could develop alliances or at times acquire UK
biotechnology firms, to move into newly developing
technology fields.
Although non-systematic, evidence also indicates
that UK firms have created internal organizational
structures to encourage a rapid response to changes
in the competitive environment. The often divergent
interests within finance and research departments are
aligned, in part, through linking promotion and bonus
opportunities for finance personnel directly to the
commercial success of research. Thus, financial per-
sonnel are directly involved in R&D decision-making,
by being included on the scientific committees (taken
from interviews). An additional practice is to train all
lead scientists in management and financial analysis.
As a result, each of the UK firms we visited had
developed extensive expertise in assessing the com-
mercial viability of projects. Factors such as potential
market size and potential in OTC markets were cited
as central in all research decisions. Partly due to the
above, these firms were able to stop, if necessary, the
vast majority of all research projects at a very early
stage of development. Given the significant and recent
increase in the cost of innovation (the average cost
of drug development), this may prove to be a critical
success factor.
As shown in Table 2, UK pharmaceutical firms
introduced more blockbuster new chemical entities
(NCEs) than Germany in the 1980s and 1990s. Cor-
porate governance processes in German firms may
account for the weaker German performance. Given
long-term employment and the lack of unilateral
decision-making in Germany, log-rolling processes
 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879 1873

Table 2 1998. Constraints imposed by the German stake-

International market characteristics holder system of corporate governance have slowed
USA Japan Germany France UK the specialization process. Employee representatives
Market size (US$ billion) on company boards have blocked or held up sales
1987 39.3 30.2 11.8 10.2 8.2 of non-pharmaceutical related businesses for fear of
1993 70.8 51.1 19.5 17.1 14.9 dismissals (Vitols, 2002).
1999 130.1 53.5 19.9 17.8 18.6 However, the leading German pharmaceutical firms
R&D intensity (%) have, in very recent times, attempted to react to the
1983 10.6 6.7 8.4 7.1 11.7 changing industry dynamics. Both Bayer and Aventis
1992 14.3 9.8 9.2 8.7 16.3 have attempted to increase the number of therapeutic
1998 18.9 11.7 15.6 11.4 22.3
areas within which they are active. This mirrors the
New chemical entities (NCEs) strategy taken by the largest UK and US firms, and
1971–1980 154 74 91 98 29
allows firms to increase their capacity to scan different
1981–1990 142 129 67 37 28
1990–1999 161 113 40 23 32 research programs occurring within universities and
biotech firms. Aventis, for example has advanced the
No. of products in Top 50
1985 23 5 5 1 9
farthest along this new strategic path. It has attempted
1990 27 2 5 0 12 to transform itself into a life sciences group, selling
1998 31 2 3 0 10 many of its basic and specialty chemical subsidiaries
1995–1999 24 3 4 3 8 in order to pay for the takeover of Marion Merrell Dow
Firms’ market share in the US (%) and Rhone-Poulenc Rorer, and expand its activities in
1989 62.0 0.1 14.0 0.2 8.8 pharmaceuticals and agrochemicals.
1998 58.5 1.5 6.8 1.8 11.6 Interestingly, and in contrast with UK firms, Ger-
2001 64.0 4.0 6.0 4.0 15.0
man firms have not invested in the domestic market,
Source: Sharp and Patel (1996); EFPIA (2002) (USA and Japanese but primarily in overseas networks, accessing the US
R&D intensity: 1998 data = 1995); Matraves (1999); Gambardella science base in emerging technologies. Aventis, for
et al. (2000); VFA (2002), ABPI (2002).
example has transferred most of its biotech research
to US labs acquired during the takeover of Marion
could result in many, potentially low return, projects Merrell Dow (Wirtschaftswoche, 1997). According to
being approved, out of concern of alienating key con- Sharp and Patel (1996), Aventis and Bayer each have
stituencies within the firm. Moreover, the high number over a dozen different biotech collaborations with uni-
of NCEs developed by German firms, but relatively versities and biotech firms in the US, but as of 1995,
few blockbusters, could also be a product of strong Bayer had one dedicated biotechnology lab in Ger-
functional departmental organizations within German many, while Aventis had none. This can be partly ex-
firms (Lehrer, 1997)—commercial or financial con- plained by the very late development of a biotechnol-
siderations might be difficult to impose on research ogy sector in Germany (Casper, 2000). The relative
scientists, implying that marginal projects would be inability of German pharmaceutical companies to ac-
continued. cess biotechnology based discovery techniques forms
An additional problem has been the slowness an important and complementary explanation to our
by which leading German firms have moved away emphasis on corporate governance, which we discuss
from diversified activities focused around traditional in more detail in Section 4.
chemistry-oriented businesses to a “life-science” ori- Overall, German patterns of company organization
entation focused on pharmaceuticals. The two leading impede top managers from quickly making strategic
German firms, Bayer and Hoechst (now Aventis), realignments. New competencies must be slowly built
were far less focused during the 1980s and 1990s up through hiring newly trained scientists and, when
than UK firms, deriving only a certain proportion of possible, reassigning internal scientists into new ar-
their sales from pharmaceuticals. In 1993, the pro- eas. Firms are also hesitant to dedicate resources into
portions were 23 and 24%, respectively; these had new areas in which the probability of adequate returns
increased, but non-significantly to 25 and 31% by is unknown. German firms can gradually reduce the
1874 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
work force through early-retirement programs, limit-
ing new-hiring, or selling entire subsidiaries, but gen-
erally cannot lay-off full-time employees within par-
ticular departments. Thus, one potential explanation
for why German firms have a lower rate of return on
R&D (in terms of the introduction of blockbusters) is
that they cannot easily cut research programs that are
not producing commercially viable results, unlike in
the UK.
A possible recourse for German firms is to limit re-
search to a small number of therapeutic areas in which
the company has a proven record of success. This is
the strategy taken by the medium-sized German phar-
maceutical firms (Schering and Boehringer Ingelheim,
for example).16 However, this has the adverse con-
sequence of limiting the absorptive capacity of the
company. Without a number of platforms in different
therapeutic areas, the ability of German firms to scan
basic research in biotech firms and at universities is
lessened.
In summary, the evidence is consistent with our
theoretical expectation that the leading German firms
will react later than the UK firms to the identified
changes in competitive pressures within the pharma-
ceutical industry. The ability of UK shareholders to
quickly punish UK firms, through driving the share
price down of poorly performing firms, combined with
significant managerial flexibility in reorganizing as-
sets within the firm, has engendered better adaptation
to changes in competitive pressures than observed in
Germany.
We now turn to look at various measures of rel-
ative performance by UK and German firms. Using
such summary measures, a picture can be constructed
of how Germany and the UK stood at the end of
the 1990s.17 For perspective, a brief comparison is
made with the other leading nations of the US, Japan
and France. The aggregate market characteristics for
16 Clearly, this is not the only factor for a firm to choose to
be present in only a few therapeutic areas. Other crucial factors
include extremely high R&D costs and a lower probability of
access to capital for mid-sized firms.
17 The number of products in the Top 50 is included because al-
though some NCEs are truly original, others may be incremental
improvements, which could make the NCE data somewhat mis-
leading. US market share is included as a crude measure of com-
petitiveness, as the US is the largest, most competitive and most
open domestic market.
the five largest pharmaceutical producing nations are
shown in Table 2.
Immediately, we note that US pharmaceutical
firms lead the world in terms of R&D expenditure,
NCE introduction, and domination of the Top 50
“blockbusters”.18 Japan is in a weak position, with
low R&D expenditure, few innovative drugs, and a
poor market share in the US. Table 2 shows, however,
that within the European Union, the success story
in the 1980s and the 1990s was the rise of the UK,
with France being in the weakest position (see also
Thomas, 1994).
Within the UK, there was a relative increase in R&D
expenditure, and UK firms were extremely success-
ful in developing commercially successful NCEs.19
During the 1981–1990 period, although only 28 new
drugs were developed, a relatively high percentage of
these were blockbusters.20 During the 1990s, although
UK firms again produced relatively few NCEs, a rel-
atively high percentage became blockbusters. Thus,
the evidence overall is consistent with our argument
that managerial structures within UK firms effectively
persuade research scientists to “kill” the vast majority
of compounds in development at an early stage. This
renders the expensive later stage clinical tests and reg-
ulatory approval processes more efficient.
Germany, on the other hand, had a much weaker po-
sition at the beginning of the 1990s, and indeed, their
position remained about the same during the 1990s.
This is in contrast to the early to mid 1980s where
Thomas (1994) includes the US, Switzerland, the UK
and Germany in “the first tier of strong competitors”.
As Table 2 shows, Germany developed far more drugs
(67 NCEs between 1981 and 1990), spent approxi-
mately the same amount as the UK on R&D, but at
18 Data shows that US firms were more successful than the EU
and Japan in introducing “global” drugs. Thus, in the US, 22%
of all NCEs were globalized (being sold in all major markets),
whereas the corresponding figures were 13 and 6% for the EU
and Japan, respectively (EFPIA, 2002).
19 As a measure of relative R&D productivity, the ratio of the
share of patents to share of R&D expenditure was measured (ABPI,
2002). The UK ratio for the period 1990–1999 was 1.7, well ahead
of Germany at 0.9.
20 As a specific example, the UK’s leading firm, Glaxo (at that
point in time), rose from 17th in the world rankings, in terms
of sales, to first, between 1983 and 1995. This was essentially
achieved through the successful development and marketing of its
anti-ulcer drug, Zantac.
 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879 1875

Table 3
Top 20 global market shares (%) and R&D expenditure (US$ million)
1998 1995 1992 1988
Share R&D Share R&D Share R&D Share R&D
Novartis (Ch) 4.2 1799.3 2.5 1600.0 2.2 797.0 2.2 600.0
Merck (US) 4.2 1821.1 3.5 1331.4 3.6 1111.6 3.2 668.8
Glaxo Wellcome (UK) 4.2 1927.4 4.5 1751.5 3.8 1043.8 2.7 409.2
Pfizer (US) 3.9 2279.0 2.9 1340.0 2.0 776.0 1.6 401.0
Bristol-Myers Squibb (US) 3.9 1577.0 3.1 1199.0 2.8 1083.0 1.6 680.0
Johnson & Johnson (US) 3.6 1800.0 2.9 1300.0 1.9 900.0 1.5 674.0
American Home Products (US) 3.1 1540.0 3.0 1355.0 2.0 552.0 2.1 350.0
Hoffman La Roche (Ch) 3.0 1880.3 2.6 1353.7 2.1 1090.0 1.5 820.9
Eli Lilly (US) 2.9 1738.9 2.0 1042.3 2.0 925.0 1.7 ∗

SmithKline Beecham (UK) 2.9 1508.1 2.5 1012.2 2.2 1089.4 1.3 300.0
Astra (Sweden) 2.8 1333.0 1.8 1121.0 1.1 298.0 X 181.0
Abbott (US) 2.5 1221.6 1.8 1072.7 1.8 772.4 1.7 454.6
Hoechst Marion Roussel (Ger) 2.5 1420.7 3.5 1400.0 2.6 792.0 2.5 550.0
Schering-Plough (US) 2.5 1007.0 1.9 657.0 1.5 511.0 1.4 ∗

Warner-Lambert (US) 2.4 877.0 1.5 501.0 1.2 473.0 1.9 219.0
Bayer (Ger) 2.1 1113.8 2.1 1023.0 1.8 891.9 1.3 645.1
Rhone-Poulenc Rorer (Fr) 1.8 1010.0 2.2 826.6 1.8 521.3 1.3 300.0
Pharmacia & Upjohn (Swed/US) 1.8 1199.0 1.7 1254.0 1.3 940.0 1.4 ∗

Zeneca (UK) 1.5 800.5 1.5 550.0 1.4 378.0 1.3 274.0
Boehringer Ingelheim (Ger) 1.4 902.4 1.5 745.0 1.3 389.0 1.2 369.0
Total (US$ billion) 302.0 40.0 250.0 33.0 229.9 26.0 156.6 15.0
Top 5 share 20.4 24.3 13.3 22.6 15.0 20.8 12.9 ∗

Top 10 Share 35.9 44.7 31.0 42.1 25.4 38.0 22.4 ∗

Source: Market shares: IMS health (printed from Pharmaceutical Executive 19 (5), 1999); Matraves, 1999, 2001, Chain Drug Review,
1999; R&D: annual reports. Total firm R&D expenditure (estimates): CMR international. Notes: X= not Top 20.
∗ Unavailable.

the end of the 1980s, accounted for only five block-
busters. By the end of the 1990s, German firms’ devel-
opment of NCEs had dropped significantly, and more-
over, Germany only accounted for three blockbuster
drugs, in contrast with 10 for the UK. As of 2001,
of the world’s Top 75 prescription medicines, the UK
had a 20.2% sales market share, as compared to just
2.2% for Germany. This is in stark contrast to 1989
where Germany was ahead of the UK—14% versus
9%, respectively (IMS).
As a final measure of international competitiveness,
Table 2 also shows that Germany’s share of the com-
petitive US market, while 14% in 1989, had fallen to
7% by 1998, and 6% in 2001. By contrast, the UK’s
market share was only 9% in 1989, rising to 12% by
1998, and 15% in 2001. This evidence is consistent
with our expectation that the UK would outperform
Germany (see also Gambardella et al., 2000).
Tables 3 and 4 highlight the competitive perfor-
mance of leading German and UK pharmaceutical
companies from 1988 to 1998. Table 3 shows R&D
expenditure and market share; Table 4 gives the 1998
sales revenue generated by the leading drugs in each
firm’s portfolio. We would expect the gap between the
two countries to widen during the 1990s, as the effects
from the key period at the end of the 1970s when “ra-
tional drug design” methods were being widely intro-
duced, as well as the other identified industry shifts,
would be felt.21 The data further emphasize the slide
in German competitiveness.
For example, Table 3 shows that Bayer slipped
from fourth position in 1988, to 12th in 1995, and
16th in 1998. Hoechst (Aventis) is maintaining, but
not improving its market position, through merger
21 On average, it takes approximately 12–14 years from discovery
to market in the pharmaceutical industry (PhRMA, 2000). Thus,
R&D works with a long lag, and one would not expect to observe
differences in performance until the early 1990s, given the escala-
tion in biotechnology spending in the late 1970s and early 1980s.
1876 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879

Table 4 Pharma, Stada and Merck KGaA, where most are

Firms’ portfolio of leading drugs in 1998 family controlled.
Indication 1998 Data on R&D expenditure reinforce the general
(US$ million) conclusion that UK firms have outperformed German
Glaxo Wellcome firms. Looking first at 1993 annual report data, Glaxo
Zantac Gastro-intestinal 1251.9
(UK) had the highest R&D expenditure of US$ 1.3 bil-
Imigran/Imitrex CNS disorders 1154.3
Flixotide Respiratory 823.5 lion, operated in several therapeutic areas, with six Top
Serevent Respiratory 823.5 50 products, including the (previous) global number
Zinnat Anti-bacterial 679.7 one, Zantac (gastro-intestinal). SmithKline Beecham
SKB (UK) spent US$ 743.5 million, with four Top 50 prod-
Seroxat/Paxil CNS disorders 1760.0 ucts, including Tagamet (gastro-intestinal). Hoechst
Augmentin Anti-infective 1600.0 (Ger) spent US$ 967 million but had no products
Havrix/Engerix/ Hepatitis vaccines 888.0 in the Top 50; Bayer (Ger) spent US$ 723.5 mil-
Twinrix
Relifex/Relafen Anti-inflammatory 510.0
lion with two products in the Top 50, including Cipro
Kytril Anti-nausea (cancer) 345.0 (anti-infective).
By 1998, Table 4 shows that the picture is not
AstraZeneca
Prilosec/Losec Gastro-intestinal 3976.1 much better for German firms. The data show that
Zestril Cardiovascular 1119.6 UK firms earn significantly more revenue from their
Diprivan Anaesthetic 649.9 leading drugs than German firms do, with the excep-
Zoladex Oncology 623.4 tion of Cipro for Bayer (which was also its leading
Nolvadex Oncology 522.6
drug in 1993). This is particularly important in the
Tenormin Cardiovascular 499.4
pharmaceutical industry, given that the return to new
Hoechst drugs is highly skewed, and only the Top 30 drugs
Cardizem Hypertension/angina 814.3
Allegra Seasonal allergic rhinitis 484.7
worldwide cover average R&D costs (Grabowski and
Delix Hypertension 403.5 Vernon, 1990, 1994). Thus, it is vital for a leading in-
Trental Cardiovascular 265.4 novator to have blockbusters in its portfolio in order
Claforan Anti-infective 256.9 to be able to continue investing in R&D for the future.
Bayer Again, the data is consistent with our expectation that
Ciprobay/Cipro Anti-infective 1402.5 UK firms are better able to generate blockbusters than
Adalat Cardiovascular 1045.1 German firms are.
Kogenate Hameophilia 428.5
Boehringer Ingelheim
Atrovent Respiratory 697.8 4. Discussion
Viramune Anti-infective 154.0

This paper discussed differences in German and UK

and acquisition activity rather than internal growth,
e.g. the acquisition of Marion Merrell Dow (US)
for US$ 7.1 billion in 1995, and the merger with
Rhone-Poulenc Rorer to form Aventis in 1999. Also,
even though Aventis spends more on R&D than sim-
ilar sized firms, in terms of market share, it is not
seeing an improvement in its position (although as
noted earlier, R&D works with a significant lag). As
already discussed, the UK rapidly consolidated at the
end of the 1980s and the beginning of the 1990s,
whereas German market structure remains far more
fragmented. Beneath the giants such as Aventis and
Bayer, there are many mid-sized firms, e.g. Schwarz
corporate governance institutions, and the impact of
these differences on organizational structure and the
ability to take advantage of the rapidly changing tech-
nologies within the global pharmaceutical industry.
UK firms rapidly developed new competencies in re-
search, marketing and distribution, and outperformed
their German competitors, who did significantly bet-
ter, on the other hand, when the discovery process was
based on incremental modifications. We argue that this
superior response is precisely because the UK institu-
tional framework better advantages the development
of rapidly changing product market strategies neces-
sitated by structural market changes. In other words,
 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
due to shareholder pressures linked to ownership struc-
ture and organizational flexibility, UK pharmaceutical
firms were able to react more quickly than their Ger-
man rivals to changed competitive conditions.
While the evidence presented is consistent with our
expectations following our institutional framework
approach, important complementary explanations do
exist. One such alternative explanatory variable that
could also help to explain relative performance differ-
ences is the system of regulation in the two countries.
Although concentrating primarily on UK–France
variations, Thomas (1994), for example provides an
excellent analysis of implicit industrial policy, argu-
ing that in both the US and the UK, stringent clinical
trials were required, where new drugs had to be both
safe and efficacious. This mitigated against the in-
troduction of imitative drugs, whose revenue would
be unlikely to cover the cost of the trials. More-
over, part of the reason for UK success in the 1980s
was the imposition of pricing regulations. Although
prices were not fixed in the UK, a rate of return on
capital was set under the Pharmaceutical Price Regu-
lation Scheme, which was higher for export-oriented
firms. This indirectly encouraged the development
of blockbusters, rather than imitative ‘me-too’ drugs,
because export-oriented drugs had to be able to com-
pete in overseas markets. However, when comparing
price regulation across Germany and the UK, neither
country’s government directly intervenes in pricing
(ABPI, 2002), and generic penetration rates are high.
Indeed, and also as in the US and Switzerland, firms
are free to set the launch prices of new medicines.
Overall, it appears that price regulation per se cannot
explain observed performance differences.
A second alternative explanatory variable derives
from the wider literature on national systems of in-
novation (Nelson, 1993; Edquiest, 1997). When con-
sidering Germany and the UK within this approach,
both countries invest relatively large amounts of fund-
ing into basic research systems, although slightly more
biomedical research is funded and resulting publica-
tions exist in the UK than in Germany (Wellcome
Trust, 1998). However, the UK national system of
innovation appears to have been more successful in
commercialization via the setting up of biotechnology
firms—the primary organizations that pharmaceutical
firms have tapped into to develop new research capa-
bilities (Henderson et al., 1999).
1877
One of the major factors underlying this result is that
until 1993, much commercial biotechnology research
in Germany was undermined by regulation covering
all areas of genetic research. While the UK biotech-
nology sector achieved critical mass in the late 1980s
(Senker, 1996), in Germany regulatory restrictions on
recombinant DNA research and an undeveloped ven-
ture capital market, among other factors, thwarted the
development of a biotechnology sector until the mid
to late 1990s. Only in the late 1990s has a substantial
biotechnology boom occurred in Germany to ben-
efit domestic pharmaceutical firms, resulting from
relaxed regulations on biotechnology research and
active government promotion through the ‘BioRegio’
programs and subsidies granted by regional Lander
governments. Moreover, German firms have had more
leeway due to the implementation of the Single Eu-
ropean Market and the establishment of the EMEA
in 1995 (which harmonized European rules and pro-
cedures governing innovation in the pharmaceutical
industry), where interestingly, German firms have
adopted EU regulations.
However, it is noteworthy that the evidence sug-
gests that even with deregulation, most German
biotechnology firms have specialized in a variety
of platform-technologies, rather than therapeutic re-
search (Casper, 2000). In other words, firms are invest-
ing in “generic” scientific competencies that are rather
more cumulative or incremental than radical. This ties
back into our main theoretical argument that German
firms are (strategy) constrained by the nature of the
institutional framework in which they are embedded.
Therefore, although the national system of innovation
and regulatory system can complement the basic argu-
ments that we have made, they cannot replace them.
Thus, and in keeping with the broader evidence
(Porter, 1990; Hall and Soskice, 2001) documenting
cross-national variation, German firms appear to be
particularly successful within industries necessitating
long-term capital investment, access to highly skilled
workers, long-term managerial employment with rel-
atively low-powered remuneration incentives, and
in-house R&D. The institutional complementarities
between finance, career development and skill forma-
tion, and company organization advantage a variety
of “DQP” product market strategies.
Our results show how, especially during the 1980s,
these same institutions created severe problems for
1878 S. Casper, C. Matraves / Research Policy 32 (2003) 1865–1879
German firms attempting to achieve successful per-
formance in the pharmaceutical industry. Although it
would be unwise to attempt to generalize across in-
dustries, from the evidence presented in this case, it
is clear that the institutional framework has advan-
taged UK firms over German firms. As mentioned
earlier, one limitation of our analysis is the lack of
detailed qualitative evidence linking national institu-
tional constraints and incentives in each country to
differences in corporate decision-making, which we
argue does account for the performance differences
across the UK and Germany. Future research could
usefully pursue this avenue, combining institutional
analysis with more detailed case-study research on the
organizational processes accompanying the introduc-
tion of new R&D processes (for example, Zucker and
Darby, 1997; Nightingale, 2000).
Finally, change is occurring in Germany, both at
the corporate and institutional levels. Leading German
pharmaceutical firms such as Aventis are embracing
the globalization of the pharmaceutical industry, but
are continuing to invest within the national economies
where the organizational competencies for each part
of the value chain may most easily be created. Further-
more, as a reaction to a widespread debate over a de-
cline in the country’s innovative capacity, the German
government has begun to reform its corporate gover-
nance system. Reforms include new laws simplifying
the use of employee stock-options, a reform of com-
pany law reducing the size (but not composition) of su-
pervisory boards, and—perhaps most far-reaching—a
decision to abolish capital gains taxes on the sale of
long-term shareholdings (Vitols, 2001). While these
changes do not imply a convergence of the German
corporate governance system to Anglo-Saxon norms,
they reflect a consensus that an increase in shareholder
value norms can usefully help firms react more swiftly
to increasingly competitive global marketplaces.
Acknowledgements
We would like to thank Mark Lehrer, David Soskice,
Sigurt Vitols and two anonymous referees for their
many helpful comments. We would also like to thank
the WZB (Social Science Research Center), Berlin,
Germany for financial support during the writing of
this paper. All remaining errors are ours.
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