CEO Blog: Russia — A New Home for Innovation
Novartis broke ground this week for our new manufacturing plant outside St. Petersburg, Russia. The facility is part of our $500 million, five-year commitment to help improve Russia’s healthcare infrastructure. Our investment addresses local manufacturing, R&D collaborations and public health development.
We are one of the first healthcare companies to make a full-size investment in Russia. We didn’t want to wait for others to enter the market. We wanted to work together with the government to become Russia’s leading partner in supporting their efforts to reform and expand access to healthcare.
I’ve seen vast changes in Russia over the last few years that are positive for multinational businesses. But I believe every government has to challenge itself to sustain innovation, create jobs and encourage economic growth. Russia of course has more steps to take, but so does the US.
Today, I’m constantly faced with choices about where to prioritize our investments. Switzerland is our headquarters, and we benefit from its stability, highly educated talent pool, and reputation for quality. But for the future, emerging markets are critical to our growth. We’ve invested significantly in China, and have just started to build a $1 Billion R&D institute in Shanghai. We’ve also announced plans for a manufacturing plant in Brazil. Yet I’ve had mixed thoughts about next steps in Russia, given perceptions about lack of transparency and whether it could be viewed as a top priority for business investment.
Historically, it has been hard for foreigners to get a foothold in Russia. Yet the country ranks among the emerging markets slated for high growth. I asked myself what was driving my interest in investing? Is it simply to protect existing market positions or to build a mutually beneficial partnership with Russia? For me, one key factor is patient needs. There is significant unmet medical need here, and high mortality from preventable diseases. Russia’s population is declining, and the government recognizes the need to improve access to quality healthcare.
Recently, I participated in a Foreign Investment Advisory Council meeting, a task force of international business representatives and government officials where we discussed how Russia can attract investment and become a leader in innovation.
I was struck by the concrete steps that have been taken to encourage investment.
For example, Russia has set up a $10 billion fund to help attract foreign investment.
The government has invested more than $1.6 billion since 2005 to set up special economic zones that offer significant tax incentives for international investment, and as of last year, these zones have attracted more than 250 investors from 18 countries.
There are also plans to build a Russian “Silicon Valley” outside Moscow to attract high-tech investment. Additionally, Russia is pushing to gain entry into the World Trade Organization this year.
Shifting Novartis’ center of gravity towards emerging markets will be critical for our future, as developed markets face slow growth. In the back of my mind were issues in the US: one of the higher tax rates for business, trade restrictions and heavy regulations on several industries, including healthcare. There is a sense among some companies that the US is becoming a difficult place to do business: Foreign direct investment in the US fell 37% in 2009. Of course there are many important advantages to investing in the US, and I am hopeful that America can continue its strong history of innovation for many years to come.
However, when you compare this with the incentives the Russian government is offering, it’s clear that a shift is taking place. The International Monetary Fund forecasts that the Russian economy will rank in the top five by 2016, up from eleventh today. In December, Prime Minister Putin announced that foreign direct investment would total about $40 billion in 2010, up more than 150% from $15.9 billion in 2009.
I see four things that are critical to our business decision-making and that will influence our strategy in Russia:
First, the country must have a stable economy with incentives for business. This includes favorable tax and trade laws that encourage long-term investment in the sectors that will have a meaningful impact on society. We also look for predictability and transparency of decision making. This means clear market regulations and standards, a level of certainty in pricing and market access, and consistent enforcement.
Second, strong protection of intellectual property is critical. Our business model is based on IP protection to recover the heavy cost of R&D, which is one reason we are not investing as heavily in India today. Russia has recently passed legislation that does more to protect IP, including a new provision to the “Law on Medicines Circulation” that for the first time provides data exclusivity. However, this will only take effect once Russia joins the WTO and it’s still to be seen how it will be enforced.
Access to best-in-class local talent is third. We have seen the talent pool in Russia improve in recent years. Today more than half of the population has a college or technical degree, which is the highest in the OECD. This rate even surpasses that of the US, which is around 36%.
And fourth, it is vital that business is conducted ethically. It is true that Russia has had problems with governance, but they are working to make changes. Russia was recently invited to join the OECD Anti-Bribery Pact, after passing important new anti-bribery laws. This will not be a quick fix, but I believe the government is taking the right action for long-term improvement.
Joseph Jimenez is Chief Executive Officer (CEO) of Novartis since February 1, 2010. Mr. Jimenez is responsible for leading the company’s diversified healthcare portfolio of leading businesses in innovative pharmaceuticals, eye care, generics, consumer health, vaccines and diagnostics. Previously, Mr. Jimenez served as Division Head, Novartis Pharmaceuticals.