J. Serv. Sci. & Management, 2008, 1: 159-164
Published Online August 2008 in SciRes (www.SRPublishing.org/journal/jssm)
copyright © 2008 SciRes JSSM
Technology Innovation Stratagem and Role Played by
MNCs: Evidence from Chinese Pharmaceutical Sector
Li-Li Cao1 & Xiang-Dong Chen1
1The School of Economics & Management. Bei Hang University, Beijing, 100083, P. R. China
ABSTRACT
It is widely regarded that the pharmaceutical sector is quite different from other manufactures for its character in in-
novation activities. This paper analyzed the nature of innovation activities by multinational companies (MNCs), which
stand for foreign capital, focusing on two parameters named: size and scope of innovation through investigating patent
data from 1985 to 2005. The paper reveals the role of the foreign capital and identifies their technology stratagem by
developing a tool named Double- S Matrix. Research finding indicates that foreign capitals play an important role on
overall national innovative competitiveness in this sector. Implications from this research can be used as reference to
policy makers and business companies in China.
Keywords: size of innovation, scope of innovation, Double- S Matrix
1. Introduction
It is widely believed in international literature that inno-
vation movement in pharmaceutical field is unique if one
compares with other manufacture sectors. The major rea-
sons for this are frequently listed as typical R&D inten-
sive sectors, more explicit knowledge based technologies,
and one of the industries highly interdependent among
larger MNCs and local SMEs in high tech sectors, espe-
cially, due to discontinuity nature in innovation process
accompanied with emergence of bio-pharmaceutical tech-
nology in 1970’s [7].
Technology development route in pharmaceutical in-
dustries thus can beco me more versatile or diversified, as
Bogner and Thomas’s work [4] indicated (as four differ-
ent technology trajectories based on historical facts in
pharmaceutical sectors in the US). Bogner and Thomas [4]
therefore considered that strategic innovation and its clas-
sification were the major issues for firms in the industries,
especially for larger MNCs. The sophisticated nature in
innovation strategies in firms as well as in countries in the
whole in pharmaceutical sectors can be best described by
Hara’s hypothesis [8]. He emphasized four basic forces
regarding to input of R&D activities and outcome of the
R&D process, namely, molecule-biological (technologi-
cal) learning, interact factors during application process,
market forces, and strategic roles of organizations.
The objective of this paper is to produce new empirical
evidence pertaining to the characters of technology com-
petition by MNCs. Based on patent data; this article hold s
several original features. Firstly, investigate the charac-
ters of innovator from a macro-level, data based on coun-
tries level was employed to reflect the innovation by
MNCs. Secondly, developed a tool to analysis the role of
the foreign capital and reveal their stratagem.
2. Literature Review and Research Frame-
work
2.1. Innovation in the Pharmaceutical Sector
Due to its exceptionally high R&D to sales, the pharma-
ceutical industry is often characterized as a technology-
and science-driven sector. The radical innovation in drug
industry is a function of the new technological and scien-
tific knowledge embedded in the drug development [1].
The current research on innovation in the sector falls into
four major aspects. Firstly, regional character is more
significant in drug industry. Previous research shows that
there is a intensive demand of regional proximity due to
the science-based nature [12]. Secondly, it is a complex
progress of innovation due to a long industry chain and
diversiform actors. Most of scholars considered that in-
novation in the sector reflects breakthrough of innovation
chain, which is also decided by the science-based charac-
ter [10]. Thirdly, patents are a good measure of inventive
activity [6]. The pharmaceutical sector has a high propen-
sity to patent relative to other industries [17], also corre-
lated with ratings of basic research excellence [18].
2.2. Technology Competition Based Diversifica-
tion
There are many literatures to reveal the character of tech-
nology competition. Many of them focus on the two pa-
rameters: size and diversification, as well as their rela-
tionship [3]. It wildly believed that larger countries have a

160 Wen-Zhu Li, Li-Li Cao & Xiang-Dong Chen
tendency to spread their research activities across many
technological fields while small countries tend to concen-
trate on narrow niches. Later, Cantwell [7] used the data
of 24 famous MNCs, focused on the size-diversification
relationship has been stable over time or has changed in
different historical periods, shows how the nature of this
relationship has changed historically. Castaldi [6] analysis
diversification patterns of Italian manufacturing firms,
offered empirical evidence on a robust relationship be-
tween firm size and diversification. Breschi [5] analysis
the diversification of innovation activates by identified
two type of innovators: diversified innovators and spe-
cialized innovators . However, The theoretical and em-
pirical literature has paid extensive attention to large
firms’ technological diversification of technology compe-
tition [11]; the equivalent phenomenon has been largely
neglected and there are paucity of research at a country
level.
3. Empirical Methodology and the Data
3.1. Hypothesis
In China, it is necessary for local firms to innovation to
increase added value of products. It is important to study
the innovation disciplinarian of the sector could promote
industry’s development and renew the structure of indus-
try. However, the innovation disciplinarian must be influ-
enced by foreign innovation activities because of the na-
ture of FDI in China’s pharmaceutical. This paper pro-
vides a research on the foreign patenting activities based
on three main hypothesizes.
Hypothesis 1: Technology resource competition is de-
termined at least by two parameters: size of technology
and scope of technology.
Hypothesis 2: In Chinese pharmaceutical sector, there
are two kinds of innovators, one is local firms and the
other is MNCs invested by overseas capital. The two
kinds of innovators interact with each other to control
more technological resource. One side, they pursue the
quantity of patent to ensure they have the expert advan-
tage in certain field; the o ther side, they explore the tech-
nological scope to achieve the diversification effect.
Hypothesis 3: The diversification effect mainly comes
from two aspects. One is from the diversification among
the different product portfolio like the diversification be-
tween chemical preparations and biochemical medicines.
The other is from the different process technology in pro-
ducing a certain product. For example: the diversification
between C07K and C12P which both belong to the tech-
nology for biochemical medicines.
3.2. The Empirical Methodology
Size of innovation
It is not our objective to examine the overall effect of
region size upon specialization in general (e.g. in new
production and trade) ，but rather to concentrate on the
innovation effort. Therefore, size here is related only to
the technological activities carried out by regions in
China’s pharmaceutical sector. This paper measured in-
novation through the number of patent. However, patent
data is a kind of count variable that obey the Poisson dis-
tribution. So we defined it in log
ii
s
ize TP=where i TP
represents the accumulative patent in ith period.
Scope of innovation
It is demonstrated that the entropy value is an effective
measurement of the degree of diversification. This meas-
ure takes into account both the number of technologies in
which a region might be active, as well as the relative
distribution of technological activity across the technolo-
gies. Thus, this study will also utilize the entro py inde x to
analysis the technological diversification among the sam-
ple in order to analysis the scope of technology resource.
Therefore, we defined:
1
1
ln
n
jij
iij
entropyp p
=
=∑ , where
ij
p in the present context represents the share of patents
in China’s pharmaceutical sector accounted for by the ith
technology. The value of the entropy measure ranges be-
tween zero andln n, where a value of zero represents a
region concentrating on one technology only and a value
approaching ln nrepresents a region with an even distri-
bution of patents.
One distinct advantage of using the entropy measure is
its addictive properties. Specifically, the measure can be
decomposed into elements, which define the contribution
of technological diversification at various levels of ag-
gregation to the total. The analysis in the present study
makes use of the additive by examining technological
diversification at two related level of aggregation.
The first level of aggregation follows the classification
used by the China Patent Office, which make a distinction
between 15 fields we selected such as A61K and C07D
and so on. it is possible to distinguish between rather nar-
rowly defined technological capability and diversification.
It is a reflection of the total diversification both from the
product various and process discrepancy. The second
level aggregates the classes of technology into the 6 sub-
sectors. In this classification, patents might fall into fields
like biochemical medicines, Chemical preparations and so
on. it could provide information about distribution of
products among different regions. It is a proxy to reflect
the scope of product technologies. Considering the addic-
tive properties of entropy, the diversification of process
technologies could be obtained as follow:
12 iiTi entropyentropyentropy
−
=
, where the iT entropy
Stand for the entropy of total 15IPC classes,1i
entropy
Stand for the entropy of 6 sub-sectors which represent
diversification of product, 2i
entropy Stand for the diversi-
fication of process technologies.
And the main body of diversification will be defined as

Technology Innovation Stratagem and Role Played by MNCs: 161
Evidence from Chinese Pharmaceutical Sector
the scope of technology:
2
max{ ,}
iii
s
copeentropy entropy=1
In order to investigation the role of foreign capital in
Chinese pharmaceutical sector, a hierarchical cluster was
employed. In a hierarchical cluster problem, a set of sam-
ple (
{
}
, 1,2,...,
i
SSi n== ) is to be clustered with respect
to a set of criteria (
{
}
, 1,2,...,
i
CCi n== ). Therefore,
a nm× decision matrix can be obtained as
11 121
21 222
12
...
...
...... ......
...
m
m
nn nm
x
xx
x
xx
X
x
xx
⎡⎤
⎢⎥
⎢⎥
=⎢⎥
⎢⎥
⎣⎦
In this article m is 2, and n could be 10. Matrix X
needs to be normalized as ij j
ij
j
X
X
ZS
−
=
1, 2....10;1, 2ij== 1, 2....10;1, 2ij==
As a consequence, a normalized decision matrix is ob-
tained. Then the distance was defined by the Ward
method. The finally step is take use of the SPSS software
to obtain the consequents. It could cluster the sample into
fixed clusters, which represent the different role of the
foreign capital; it will correspond to the analysis by our
tool named Size-Scope Matrix (Double-S Matrix). It is
showed in Figure 1.
Tech-leaders usually distinguish themselves not only
by possessing the highest size of patenting but also the
broadest scope of patenting. According to this, they are
companies with high potentials to dig the technology ca-
pabilities in a broad product scope. Tech-widen types are
characterized by a comparative small size and broad
scope. They represent that kind of samples that aim at
expanding the width of the product technology scope and
allocated their technology capabilities average among the
scope.
Figure 1. Double-S Matrix
Tech-dig types have a contrary nature compared to
Tech-widen types. Samples belong to this type have a
high enthusiasm in patenting in relative smaller scope.
They aimed at digging a few kinds of technology length-
ways to attain the specialized advantages. Poor dogs rep-
resent the samples that play a comparatively piddling role
in Chinese pharmaceutical sector. They take a conserva-
tive attitude in patentin g in China an d invest inad equately.
3.3. The Sample and Data
Data based on countries level was employed to reflect the
innovation by MNCs. Considered the character of the
pharmaceutical sector which depend tightly on the gov-
ernment regulatory, historical period from 1985-2005 is
then divided into four sub-periods which shows in Table
1.
15 IPC fields corresponding to pharmaceutical was se-
lected which account for 82% of the total patent in the
sector. The explanation of this technology field is list in
Table 2; furthermore, the IPC classes were sorted related
to industry classes, which are a sub-sector of pharmaceu-
tical.
4. The Analysis of the Results
4.1. Study on Size of Innovation
Pharmaceutical sector is always thought to be a filed that
attracts most FDI in china. Chen Xiangdong [19] investi-
gated that the patent activities performed by FDI compa-
nies are most concentrated in Pharmaceutical sector. The
patenting by foreign patenting is increasing over time as
showed in Figure 2.
Thus, there are two main innovators in pharmaceutical
Table 1. the division of time periods
periodDivided criterion
1985-
1991 Patent Law Of The People’s Republic Of China en-
tered into force in 1985
1992-
1997 signed Memorandum of Understanding on the Pro-
tection of Intellectual Property, modified Patent Law
in 1992
1998-
2001 21 of the top 25 international companies have set up
FDI companies in China
2002-
2005 China joined WTO formally on Dec. 11, the second
revision of patent law was put into practice.
Table 2. The technology fields
industry classes IPC Classifications
chemical preparations A61K
medicinal chemicals C07D, C07C, C07H
biochemical medicines C12N,C07K,C12P
drug-like compounds C08L,C08G,C01B,C08F
pharmacy and Therapy C12Q,A61B
medical apparatus A61F,A61M

162 Wen-Zhu Li, Li-Li Cao & Xiang-Dong Chen
Figure 2. Foreign innovation sizes over time
sector, MNCs and local companies. It is essential to dis-
tinguish foreign patenting by FDI companies and local
patenting by local companies, because it could not only
indicate that the structure of innovation, but also identify
major force of innovation in Chinese pharmaceutical sec-
tor. Evidence from data suggested that foreign patenting
played an important part (percentage is 71%, 64%, 49%,
42% over time), however, there is a decreasing tendency
of foreign percentage over time. This tendency could not
influence us to draw a judgment that it is lack of indige-
nous innovation capacity since critical technologies in
half is controlled by foreig n cap ital. The statistic ev iden ce
could not support the point that China has an advantage
as Host County.
4.2. Evolution Character of Scope of Innovation
For the foreign capital, Fig 3.shows that there is a con-
tinuous increasing in diversification over time, while the
counterpart shows an obvious fluctuation of indigenous
patenting resource in pharmaceutical sector.
Evidence from the Wilcoxon Signed Ranks shows that
there are positive changes among the four phases, how-
ever, the changes among the first three phases are positive
but not significant (Sig. =0.114), only the technology
scope of 2002-2005 period is significant changed to that
of 1998-2001(Sig. =0.007). Investigate from the whole
period; the increasing in scope is significant statistically
(Sig. =0.013).
From the patent law passed to protection intelligence
property right in 1985, foreign capital turned eyes to Chi-
nese pharmaceutical market and take limited use of the
law to protect their innovation for the shortage of the law.
Therefore, the size and scope of foreign capital is smallest
among the 4 periods. When China revised the patent law
and implemented Regulation on Protection of Medicine,
the Chinese medical market became regular gradually.
Until 1998, twenty-one MNCs among the top 25 pharma-
ceutical ones had invested to China, mainly through
founding overseas-invested enterprises to seize market;
however, considerable part of their patenting is not pro-
duced in China. When China entered into WTO, it is
more attractive for overseas capital because of China’s
signature on some related medical terms. Moreover, since
the Danish corporation NovoNordisk set up R & D center
Figure 3. Scope of innovation over time
Figure 4. Results of Wilcoxon Signed Ranks. a: Based on
negative ranks; b: Wilcoxon Signed Ranks Test
in BeiJing in 2002, it was followed by many other MNCs.
It is obvious that MNCs turned investment on R&D ac-
tivities instead of op eration activities. These R&D centers
have the liabilities to develop new drugs directly, which
could enter more sub-sectors and seize patenting resource
conveniently.
In the first three phases (1985-1991, 1992-1997, 1998-
2001), foreign capital aimed mainly at market, therefore,
they patent to keep their market shares. With China regu-
late the related laws step by step, foreign capital patent
their technologies dramatically to pursue the advantage
along the route of their existent products, In the latest
phase (2002-2005), foreign capital aimed at acquisition of
integrated advantage including not only about market
shares, but also critical technologies. Changes of concept
prompted MNCs entered more sub-sectors and enlarged
their technology scope.
4.3. Innovation Stratagem and Role Played by
Foreign Capitals
The further research is investigation about the role of
overseas capital to identify their technology stratagem.
According to the Double-S Matrix (Figure.1), the role of
overseas capital could be analyzed in size and scope.
A Cluster method was employed to divide the samples
into four clusters. If the center of gravity of each cluster
falls into the four quadrants defined in the Double-S Ma-
trix, it could confirm the validity of the Double-S Matrix.
Employed the software (spss) to perform the hierarchical
cluster, take the number of Cluster as four, then compute
the four cluster’s center of gravity to scatter them on the
scatter plot of clusters, compare the result to the scatter
plot of samples.

Technology Innovation Stratagem and Role Played by MNCs: 163
Evidence from Chinese Pharmaceutical Sector
Figure 5. Comparative scatters
Figure 5 shows the result from the Cluster method is
accordant with the four types defined by the Double –S
Matrix. It is apparently that four clusters belong to four
quadrants to confirm the validity of the Matrix. Hierar-
chical cluster offers a class statistically corresponding to
the four roles defined by the Matrix. It is list in table 3.
In Chinese pharmaceutical sector, America and Japan
process the plentiful technology resource in most of the
sub-sectors. They play a significant role as the tech-leader
in patenting activities in Chinese pharmaceutical sector.
Usually, they have absolutely advantage in most of the
sub-sectors, while they have strength to carry out inte-
grated innovation strategy to expand the width and depth
of the technology. Tech – dig types with Represent of
German, mainly concern about a few sub-sectors, which
is important or familiar to them. They dig the potential
technology capability with motivation to obtain the expert
status and specialized technologies in some special sub-
sectors which they have related competition advantage;
therefore, they could capture monopoly profit by leading
the dominant paradigm or establishing the technology
criterion of these sub-sectors. Korea is the typical country,
which belongs to the tech-width type, which has charac-
ters of using a relative smaller size to cover a relative
broad scope of technology. They dabble in a broad filed
and seize technology resource as broad as possible. They
stimulate by diversified technology in order to achieve
the scope economy, through integrating the operating and
marketing of their diversified technologies and products.
Refer to the poor dogs, they have a narrow scope and
small size compare to the other three types. It could sug-
gest that they hold a conserv ative attitude to the Chi nese
pharmaceutical sector. However, they only keep the ap-
propriate size and scope of technology to ensure their
qualification to take part in this sector. If they have the
expectation to seize the dominant technology in some
sub-sector, they could increase their innovation activities
to be tech-dig type. If there are business opportunities in
many sub-sectors, they could implement a diversified
stratagem to obtain profit.
Table 3. Role of foreign capital
5. Main Founding and Conclusion
This paper investigated in the size and scope of tech-
nology as well as originally developing the double-S
Matrix to distinguish the role of foreign countries,
based on the patent data from 1985 to 2005. There are
two main founding this paper achieves:
Firstly, foreign capital played a critical role in pharma-
ceutical sector in China, with respect to the size and
scope over time. Secondly, there are four types of foreign
capital defined by the double-S matrix. Accordingly, the
largest countries, which called Tech-leaders, were always
digging the technology capabilities in a broad product
scope. While, smaller countries face two stratagems to
select: technologically specialized in existed sub-sector
with related comparative advantage, or expanding the
product technology scope in a low technologically poten-
tial.
These findings carry some suggestions for public pol-
icy. Governments should understand that the role of the
foreign capital. Public policy should be, therefore, tai-
lored according to the condition. One side, the govern-
ment should attract foreign capital to invest in China to
obtain the technology transfer and other profit. According
to the previous literature, the effect of technology transfer
is depend on the absorb capabilities to a large distant,
therefore, the new role of governments should be a “god
father” to support education and training, public research
and universities, and to encourage firms to invest in re-
search. It will give indigenous innovation support, includ-
ing finance to R&D activities and special funds support.
These actions could stand for public knowledge base;
enhance the attraction of the region and development of
China’s pharmaceutical sector. Further, it will foster some
pharmaceutical cluster, which embody MNCs in the in-
novation network, and make full use of the MNCs to pull
the local innovation in the global economic.
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