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Drug firms and dependency in Mexico: the case of the steroid hormone industry

Published online by Cambridge University Press:  22 May 2009

Gary Gereffi
Gary Gereffi
Affiliation:
Gary Gereffi is a doctoral candidate in Sociology at Yale University. The present article is part of a larger research project supported by a dissertation grant from the Social Science Research Council and the American Council of Learned Societies. The author gratefully acknowledges research facilities provided him by El Colegio de México during his two year stay in Mexico, and by the Center for International Affairs at Harvard University for 1977. He is indebted to Douglas Bennett, James Caporaso, Ricardo Cinta, Peter Evans, Fernando Fajnzylber, Louis Wolf Goodman, Nora Hamilton, Rhys Jenkins, Kevin Middlebrook, Theodore Moran, Kenneth Sharpe, Raymond Vernon, and Miguel Wionczek for their comments on an earlier draft of this paper. An earlier version of this paper appears in Foro International, Vol. 17, No. 4 (abril-junio de 1977).
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Extract

The relationship between foreign control and national development is a central concern of the Latin American “dependency school” of analysis, which focuses on the impact of investment by multinational corporations (MNCs) in the Third World. In the MNC-dominated steroid hormone industry in Mexico, foreign control has led to two major consequences which characterize it as “dependent”: first, there has been an unequal distribution of benefits from its growth, favoring the central capitalist economies and the MNCs more than Mexico; and secondly, at the level of domestic policy formulation, there has been a restriction of choice among local development options, since these conflicted with “global” priorities implied by the dependent situation. As an alternative to MNCs, national firms in Mexico would very likely have performed better in terms of Mexican national welfare (defined as local industry growth) and global consumer welfare (defined as identical products at lower prices). The attempt made by the Mexican State during the last two years of the Echeverria administration (1975–1976) to increase its autonomy vis-à-vis the MNCs by restructuring the industry with a new state-owned firm met with only limited success. Reasons for this include Mexico's declining prominence in the world industry due to the availability of substitutes for its raw material, and the ability of the MNCs to build a strong defense using local political allies. Yet despite the difficulties, Third World countries will need to develop strong states which can deal effectively with multinational corporations if they are to successfully establish their own development priorities.

Type
Part II
Information
International Organization , Volume 32 , Issue 1 , Winter 1978 , pp. 237 - 286
Copyright
Copyright © The IO Foundation 1978

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References

1 Unpublished data obtained from the Dirección General de Estadistica of the Secretaria de Industria y Comercio, Mexico.

2 See especially works by Fernando Henrique Cardoso, Osvaldo Sunkel, Helio Jaguaribe, and Theotonio dos Santos. For a recent overview of the extensive dependency literature, see Bath, C. Richard and James, Dilmus D., “Dependency Analysis of Latin America,” Latin American Research Review, Vol. 11, No. 3 (1976): 3–54.Google Scholar

3 At an abstract level, “control” refers to the process whereby the activity of A causes or prevents changes in B's behavior in such a way as to systematically benefit A, regardless of whether or not A intended such or whether B resisted A's action.“Power” will be thought of as an intentional, willful act of control. The act of power is thus a subset of control relations— i.e., control which is intended and which incurs resistance. See the essay by James Caporaso in this volume (pp. 13–44).

4 For a very useful synthesis and systematic comparison of the major propositions in the conventional, critical, and neo-conventional literatures on MNC impact in Third World countries, and with an appraisal of their validity for the case of Nigeria, see Biersteker, Thomas J., “Multinational Investment in Underdeveloped Countries: An Evaluation of Contending Theoretical Perspectives” (doctoral dissertation, Massachusetts Institute of Technology, 1976).Google Scholar

5 For a fruitful application of non-dependency literature to dependency propositions, see Theodore H. Moran's contribution to this volume, ‘Multinational Corporations and Dependency: A Dialogue for Dependentistas and Non-Dependentistas.”

6 Two recent essays provide a number of insights and clarifications with respect to the utility of dependency analysis. See Cardoso, Fernando Henrique and Faletto, Enzo, “Preface to the American Edition,” Dependency and Development in Latin America (Berkeley: University of California Press, forthcoming)Google Scholar; and Cardoso, F.H., “The Consumption of Dependency Theory in the United States,” Latin American Research Review, Vol. 12, No. 3 (1977):7–24.Google Scholar

7 Steroid hormones are of two main types: those that keep the species alive, which are called the sex hormones; and those that keep the individual alive by helping to regulate metabolism, which are called adrenocortical hormones or corticoids. Both are essential to human life. The high costs and inefficient techniques for isolating natural hormones forced scientific research to develop ways of synthesizing steroids from similar but more abundant materials in animals and plants.

8 Cholesterol was being obtained primarily from the spinal cords of cattle. A ton of starting material was melted down to ten to twenty pounds at the first step. Applezweig, Norman, Steroid Drugs (New York: McGraw-Hill, 1962), p. 10.Google Scholar

9 A Corporation and a Molecule: The Story of Research at Syntex (Palo Alto, Calif.: Syntex Laboratories, Inc., 1966), pp. 27–29.Google Scholar Hereafter cited as The Syntex Story.

10 The feud between the two firms was finally resolved in 1956, when Syntex and Parke-Davis entered into a series of licensing agreements.

11 Applezweig, p. 24.

12 ln 1950, it was estimated that the production of enough cortisone from ox bile to treat one patient for one year would require the slaughter of 14,600 head of cattle. The process used by Merck to manufacture this cortisone involved 37 complex chemical steps covering a period of several months. This brought the cost of an ounce of cortisone in 1950 to $4,800, 100 times the price of gold. US Congress, Senate, Committee on the Judiciary, Subcommittee on Patents, Trademarks, and Copyrights, Wonder Drugs, 84th Cong., 2d sess., July 5 and 6, 1956, p. 6.

13 The method was to pour large quantities of progesterone over a culture medium containing the soil fungus, let it ferment a day or so, and then pour it out again—each of its billions of molecules altered in the same crucial way. The result was 11-alpha-hydroxyprogesterone, which could be converted by chemical stages to cortisone.

14 Applezweig, Norman, “Steroid Hormone Products: A Key to the Future,” Drug & Cosmetic Industry, Vol. 74 (December 1953).Google Scholar

15 Applezweig, , Steroid Drugs, p. 26.Google Scholar

16 The Syntex Story, p. 39.

17 Applezweig, “Steroid Hormone Products: A Key to the Future.”

18 The Syntex Story, p. 30.

19 These two executive decrees were published in Mexico's Diario Oficial on May 7, 1951 and May 13, 1955.

20 Testimony from the founders of each of these firms is in US Congress, Wonder Drugs: Beisa, pp. 95–97; Labs. Julian, pp. 83–84; and Pesa, p. 127.

21 Ibid., pp. 59–60.

22 The six American companies were: Charles Pfizer & Co., Ciba Pharmaceutical Products Co. (Summit, N.J.), G.D. Searle & Co., Merck & Co., National Drug Co., and The Upjohn Co. Their letters to Mexico are printed in ibid., pp. 64–71.

23 Ibid., p. 67.

24 The text of these three patent licenses is given in ibid., pp. 46–52.

25 lbid., pp. 150–51.

26 Vernon, Raymond, “A Decade of Studying Multinational Enterprises,” Harvard Business School Bulletin (09/10 1976), p. 24.Google Scholar

27 Vernon, Raymond, “Multinational Enterprises in Developing Countries: Issues in Dependency and Interdependence,” in The Multinational Corporation and Social Change, Apter, David E. and Goodman, Louis Wolf, eds. (New York: Praeger, 1976), pp. 47–48.Google Scholar

28 Two recent empirical studies of MNCs in Mexico give considerable attention to the phenomenon of denationalization. See Richard S. Newfarmer and Willard F. Mueller, “Multinational Corporations in Mexico and Brazil: Structural Sources of Economic and Noneconomic Power,” US Congress, Senate, Report to the Subcommittee on Multinational Corporations of the Committee on Foreign Relations, 94th Cong., 1st sess., 1975; and Fajnzylber, Fernando and Tarragó, Trinidad Martinez, Las Empresas Transnacionales: Expansión a Nivel Mundial y Proyección en la Industria Mèxicana (Mexico, D.F.: Fondo de Cultura Económica, 1976).Google Scholar For a view of denationalization and dependency in the Brazilian pharmaceutical industry, see Evans, Peter B., “Foreign Investment and Industrial Transformation: A Brazilian Case Study,” Journal of Development Economics Vol. 3 (1976): 119–39.Google Scholar

29 Syntex, Diosynth, and Protex were all founded by Hungarian Jews who left Europe during or shortly before World War II, immigrated to Mexico, and became naturalized Mexican citizens. Labs. Julian and Pesa were established by US citizens.

30 When Syntex separated from Ogden to become an independent company in 1958, it incorporated in Panama because of that country's favorable tax laws. Syntax's ownership and operations were centralized in the United States, however, and it is thus considered as a US MNC.

31 The Schering Corporation of Bloomfield, N.J. was the former US subsidiary of Schering AG of Germany. The US Government held the Schering Corporation in custody from 1942 to 1952, at which time it was sold to the public. It has no connection or affiliation whatsoever with Schering AG.

32 Organon merged with the AKZO group of Holland in 1969.

33 Knickerbocker, Frederick T., Oligopolistic Reaction and Multinational Enterprise (Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1973).Google Scholar

34 “Product pioneering” firms possess one or more of three characteristics: (1) the firms conduct extensive research and development, (2) they employ complex, high technology productive methods, and/or (3) they engage in vigorous and sophisticated marketing activities. Ibid., pp. 13–14.

35 Stopford, John M. and Wells, Louis T. Jr, Managing the Multinational Enterprise: Organization of the Firm and Ownership of the Subsidiaries (New York: Basic Books, 1972), pp. 107–24.Google Scholar

36 Moran, Theodore H., “Foreign Expansion as an ‘Institutional Necessity’ for US Corporate Capitalism: The Search for a Radical Model,” World Politics, Vol. 25, No. 3 (04 1973): 382.Google Scholar

37 In 1968, steroid prices hit bottom. Since then, they have been characterized by a slow inflationary rise.

38 Djerassi, Carl, “A High Priority?: Research Centers in Developing Nations,” Bulletin of the Atomic Scientists, Vol. 26, No. 1 (01 1968): 25.Google Scholar

39 The Syntex Story, pp. 50–53.

40 Katz, Jorge M., Oligopolio, Firmas Nacionales, y Empresas Multinacionales: La Industria Farmaceutica Argentina (Buenos Aires: Siglo XXI Argentina Editores SA, 1974), pp. 111–14 and 62.Google Scholar

41 US Congress, Wonder Drugs, p. 115.

42 Kefauver, Estes (with the assistance of Irene Till), In a Few Hands: Monopoly Power in America. (New York: Pantheon Books, 1965), p. 42.Google Scholar

43 Ibid., pp. 11–15.

44 Ibid., p. 43.

45 Whether or not the host country in fact makes such demands for greater national benefits from the MNCs depends largely on whether key domestic elites find it in their private interests to do so. See Moran, Theodore H., “The Theory of International Exploitation in Large Natural Resource Investments,” inTesting Theories of Economic Imperialism, Rosen, Steven and Kurth, James, eds. (New York: Heath, 1974), pp. 163–81.Google Scholar For a detailed analysis of the changing balance of power between MNCs and the host government in a foreign-controlled extractive export enclave in Mexico, see Miguel Wionczek's study of the Mexican sulphur industry, in his book El Nacionalismo Mexicano y la Inversión Extranjera (Mexico, D.F.: Siglo XXI, 1967), pp. 169–314.Google Scholar

46 These “modern” industries utilize large plants and capital-intensive production techniques; they show high growth rates, and dominate production of capital and intermediate goods and consumer durables. The highest concentration of MNCs tends to be in the consumer durables industries.

47 See Cardoso, Fernando Henrique, “Associated-Dependent Development: Theoretical and Practical Implications,” in Authoritarian Brazil: Origins, Policies, and Future, Stepan, Alfred, ed. (New Haven: Yale University Press, 1973), pp. 142–76.Google Scholar

48 Data generated during the Brazilian “boom” based on associated-dependent development point to a number of potential costs of this pattern of development: it is based on a regressive profile of income distribution, it emphasizes luxury consumer durables as opposed to basic necessities, it generates increasing foreign indebtedness, and it contributes to social marginality and the under-utilization and exploitation of manpower resources. Ibid., p. 149.

49 When production costs are a small part of the total sale price, as is typical in pharmaceuticals, one consequence is that technological adaptation is less likely to occur. Vernon, Raymond, Sovereignty at Bay: The Multinational Spread of US Enterprises (New York: Basic Books, 1971), p. 183,Google Scholar citing a study by W.A. Yeoman.

50 Applezweig, Norman, “Steroids,” Chemical Week, 05 17, 1969, p. 62.Google Scholar

51 The dollar volume of the corticoids was hurt because the earliest products, cortisone and hydrocortisone, were not protected by patents, and prednisone and prednisolone, two early modified corticoids, were widely licensed. As a result, heavy competition eroded prices. The oral contraceptives, on the other hand, had much better patent protection. Eventually their prices were cut by almost one-half, but this was more than compensated by the fact that their dosages were reduced by 90 percent (from 10 mg. of steroids per tablet to 1 mg. or less). Ibid., pp. 58 and 62.

52 Efforts to push national production in the direction of the non-cortical steroid hormones would have been blocked by patents.

53 The Delft Company's big business has traditionally been the fermentation of alcohol and yeast. Later, on a much smaller scale, it began to ferment enzyme detergents, antibiotics, and steroid hormones.

54 80 percent of Proquivemex's capital stock of P $15 million (i.e., 15 million pesos) is owned by the government, with the remaining 20 percent divided equally among the six MNCs in the industry. See El Mercado de Valores, November 17, 1975.

55 Campo, Julio Labastida M. del, “Nacionalismo Reformista en Mexico,” Cuadernos Politicos, No. 3, (enero-marzo de 1975), p. 33.Google Scholar

56 The diosgenin produced by China also comes from the barbasco plant. Internationally it is an unstable source of supply, however, since China only exports diosgenin if there is an excess after its own huge internal demand for steroids has been satisfied.

57 The data come from a study conducted by Mexico's Instituto Nacional de Investigaciones Forestales, and were cited in Excelsior, October 30, 1974.

58 Proquivemex claims this is due to an irrational exploitation of barbasco by the MNCs, who have been harvesting immature plants. The foreign companies don't deny they have been gathering immature barbasco, but they claim these plants are taken from land soon to be cleared for other purposes. Thus, they say, their collection policy is rational, since the alternative would be to let this source material go to waste.

59 This fear is certainly not allayed by comments like the following, made by Syntex's general manager in Mexico: If [the foreign firms in Mexico's steroid hormone industry] have the possibility of obtaining their raw material at more convenient prices elsewhere then naturally they will not need to keep their local facilities operating in the country. If they buy in other nations, logically the local plants will disappear. (Emphasis added.) El Sol de Mexico, August 21, 1976.

60 Mexico had already suffered several major setbacks in rural industries due to the arrival of synthetic substitutes which largely displaced the demand for the natural products. When plastics, for example, greatly decreased the demand for the henequen fibers cultivated in Mexico, government subsidies to the unemployed campesinos rose to P $2 million a day (El Universal, March 13, 1976). Similar problems have shaken Mexico's cotton and natural rubber industries as a result of the rapidly growing demand for synthetic fibers and synthetic rubber. Mexico is thus quite sensitive to the internal disturbances which could result if the world demand for barbasco dropped because of external substitutes.

61 The government wanted at least some part of the stock in these companies to be sold to Mexican partners. It did not specifically request that Mexico be given a majority share, however, nor that this share be sold to the government.

62 Unless otherwise noted, all figures in pesos refer to an exchange rate of 12.50 Mexican pesos to one US dollar.

63 According to Proquivemex, the MNCs in the industry were only operating at 67 percent of their installed capacity in the early 1970s. “Informe al H. Consejo de Administracion,” Proquivemex, January 16, 1976, pp. 46–47.

64 The proposed arrangement was that Proquivemex would choose from among those products which each MNC had been producing in Mexico or elsewhere in its corporate family. Proquivemex would supply the barbasco (free), and then pay the foreign subsidiary its processing costs plus a reasonable profit. The supply of barbasco to be “toll manufactured” would be additional to that which the MNCs contracted to buy for their own use.

65 According to one major study, the objectives of the MNCs can be characterized as private, simple, well-defined, and permanent: namely, “profitability and growth, evaluated for the integrated whole of their operations at the level of the world market and in a long-range perspective.” Fajnzylber and Tarrago, p. 131.

66 The first sustained criticism of alleged MNC exploitation in the industry came out in a series of three newspaper articles published in Excelsior on October 30 and 31, and November 1 of 1974. The government immediately proclaimed that the MNCs would, in the future, be granted no more permits to extract barbasco (thus breaking with the policy which had been in force since the 1950s); only campesinos organized in ejidos would henceforth be eligible to receive permits (Excelsior, November 2, 1974).

67 ln 1970, the five states where barbasco is gathered had the following average daily incomes: Oaxaca, P $14; Chiapas, P $17; Puebla, P $21; Tabasco, P $27; and Veracruz, P $28 (IX Censo General de Poblacion 1970, Dirección General de Estadistica, SIC, cited in “Informe al H. Consejo de Administracion,” Proquivemex, January 16, 1976, Table 5.8). A campesino can gather, on the average, 50 kilos of barbasco daily. At a price of P $0.60 per kilo, this means a daily income of P $30, which is above the average of the most prosperous barbasco producing state (Veracruz), and more than double the normal daily income in the poorest state (Oaxaca).

68 The campesinos received P $1.50-$2.00 per kilo of “green” barbasco from the MNCs in 1974. The Proquivemex pricing policy was to pay the campesino gatherer P $1.50 per kilo of unprocessed barbasco for his labor, with P $0.50 going to the ejido from which the plant was uprooted for “derechos de monte” and a remaining P $0.10 going to a common ejidal fund managed by the Fondo Nacional de Fomento Ejidal. Thus, Proquivemex's total payment to the campesinos was P $2.10 for each kilo of “green” barbasco they collected.

69 Excelsior, October 11, 1975.

70 Excelsior, August 19, 1976.

71 Both the MNCs and the Mexican Government have made attempts to cultivate barbasco in Mexico. So far, the method has proven too costly and the returns too limited for cultivated barbasco to be internationally competitive.

72 Proquivemex calculated its price for barbasco by working backwards from the price of the finished steroid hormone products to the raw material cost, subtracting the costs of transformation and overhead. The sample of final products on which this calculation was based ranged from the most advanced to the least elaborated.

73 An economic study commissioned by the six MNCs concluded that at a price of P $12 per kilo of dry barbasco the MNCs could export P $612 million of steroid hormones; at a price of P $20, exports would drop to P $548 million; and at the P $70 price, the value of Mexico's steroid exports would plummet to P $30 million. “El Probiema del Precio del Barbasco en la Industria Mexicana de Productos Esteroides,” elaborated by the law firm of Bremer, Quintana, Vaca, Rocha, Obregón, y Mancera, Mexico, D.F., February 1976, p. 28.

74 Ironically, this report was first published by the Wall Street Journal (March 8, 1976). It was quickly picked up by a major Mexico City newspaper (El Sol de Méico, March 9, 1976). The MNCs tried to recoup their prestige by placing full-page ads in all of Mexico City's main dailies denying the veracity of the story and making counter-charges of their own. (This ad, dated March 11, 1976, appeared in most papers the following day.)

75 Newspaper accounts of this meeting were printed on March 13, 1976. The campesino unions formally published their demands for nationalization a few days later. See Excelsior, March 15, 1976.

76 The meeting was held on August 15 and 16.

77 The one exception was Diosynth, which ran out of its barbasco reserves in May, and agreed to “toll manufacture” 160 tons of dry barbasco into intermediate products for Proquivemex in June. Diosynth discontinued its operations for the state firm, however.

78 “Derechos de monte” refer to the Mexican law stating that in order to exploit natural resources lying on the surface of the land—such as trees for lumber, or surface mining to get at ore deposits—one must pay the owner of the land for the resource used. The MNCs claim the charge against them of neglected payments is without any legal foundation for two reasons: first, no government authority had ever previously requested that such payments be made for the Dioscorea plants; secondly, if such a legal obligation did exist, it should rightfully fall upon the campesinos who gathered the plant rather than on the companies which bought it. See Excelsior, August 17 and 19, 1976.

79 El Sol de México, August 17, 1976.

80 Proquivemex, , “Informe al H. Consejo de Administracion,” 01 16, 1976, pp. 43–44.Google Scholar The estradiol example is also mentioned in Excelsior, March 20, 1976. For more information on transfer pricing in the pharmaceutical industry in Latin America, see Vaitsos, Constantine (on Colombia), Inter-country lncome Distribution and Transnational Enterprises (Oxford: Clarendon Press, 1974), and Katz (on Argentina), pp. 33–34.Google Scholar

81 El Sol de Méico, August 18, 1976.

82 Novedades, August 18, 1976.

83 The Proquivemex product which most seemed to worry the national laboratories was the antibiotic ampicillin (the second-generation penicillin). Many firms knew how to make it and it was bought in large quantities by the government.

84 The government market accounts for about 25 percent of all pharmaceutical sales in Mexico. It was estimated to be worth $240 million (US) in 1976. Business Latin America (03 24, 1976): 90.Google Scholar

85 El Heraldo, August 19, 1976.

86 El Sol de México. November 4, 1976.

87 El Día, April 14, 1977.

88 Evans, pp. 133–36.