British Journal of Management, Vol. 11, 341–356 (2000)
Innovation Management as a
Post-Modern Phenomenon: The
Outsourcing of Pharmaceutical R&D
Oswald Jones
The Business School, Manchester Metropolitan University, Aytoun Street,
Manchester M15 3GH, UK
The institutionalization of R&D by large, modern organizations is regarded as one of
the most significant social and economic factors of the twentieth century. In recent
years post-modern organizations have begun to replace bureaucratic control with
market control. This approach is particularly attractive in the case of R&D employees
who have been relatively successful in resisting direct managerial control. Government
statistics are used to demonstrate that external R&D increased from 5% to 16% of
internal R&D expenditure between 1989 and 1995. This trend is examined in the
context of consolidation within the UK pharmaceutical industry, which has considerable implications for the sustainability of high-technology industry in the UK.
Introduction
In this paper I argue that technological innovation was central to the emergence of modern
industrial societies. The Enlightenment emphasized
a rational approach to understanding natural
phenomenon on which the exploitation of scientific knowledge was based. At first this exploitation was on a relatively small scale, as individual
scientists from Galileo to Newton increased
general understanding of the physical world. In
the UK, innovations by ‘tinkerers’ such as Kay
(Flying Shuttle), Arkwright (Water Frame),
Crompton (spinning Mule) and Hargreaves (Spinning Jenny) encouraged productivity increases in
the cotton industry which prompted the first
Industrial Revolution (Landes, 1969). From the
time of Galileo until the emergence of industrial
society there was a very clear distinction between
scientific understanding and practical technological
knowledge. Kuhn (1959) argued that the science
of thermodynamics owed much to the practical
understanding of steam power. In the last decades
of the nineteenth century the development of
science and technology became more closely
© 2000 British Academy of Management
related. With the emergence of ‘high-technology
industries’ such as chemicals, steel and automotives, science was systematically incorporated into
business.
Although scientific knowledge did find practical applications in early phases of the Industrial
Revolution it was the early twentieth century
before science and scientists were ‘directly and
overtly involved in major economic, industrial
and military developments’ (Bernal, 1965, p. 492).
The emerging ‘modern’ industrial firm was typified by an R&D (research and development)
function which was responsible for the exploitation of scientific knowledge. Such firms dominated the economies of most industrialized countries
for the first 60 years of the twentieth century.
Daniel Bell (1974) used the term ‘post-industrial
society’ to describe the shift of employment and
wealth creation from manufacturing to services.
More recently, some observers suggest that there
has been a transition from modern to postmodern
society. Postmodern organizations are regarded as
having very different attributes from the modern
bureaucracies described by Weber (1924). In particular, control is enacted via the market-place
342
rather than by bureaucracy which permits a more
flexible response to external change. Whittington
(1990) argues that professional employees are
also undergoing a process of restructuring as large
firms increasingly manage R&D through market
mechanisms.
There is a distinction between post-modern and
postmodern: inserting a hyphen indicates a period
after the modern in which society is seen to be
moving into a different epoch. Hence, postmodernity has strong similarities with other terms
such as post-capitalism, post-Fordism and postindustrial. Parker (1992, p. 9) argues that the
implications for organization theory are ‘fairly
clear’: post-modern organizations are typified
by radical shifts in structure, culture and function.
In contrast, postmodernism relies on a poststructuralist epistemology which suggests that we
can only know the world ‘through the particular
forms of discourse that our language creates’
(Parker, 1992, p. 9). The key issue, according to
Parker, is that writers must distinguish between
post-modern and postmodern approaches to the
study of organizations. In this paper I discuss the
emergence of ‘virtual R&D’ as a strategy by
which senior managers attempt to reduce the cost
of innovating new products and services. I begin
by outlining the nature of postmodern organizations and this is followed by an examination of
changes in the way R&D is carried out. It is then
suggested that the externalization of R&D is a
manifestation of the short-termism typical of
major UK companies.
The data on which this paper is based are
drawn from two main sources. First, the UK R&D
Scoreboard which is published annually by the
DTI (Department of Trade and Industry) summarizes information produced in company annual
reports and consolidated accounts. Detailed data
are provided on more than 500 UK-based companies as well as the top 300 international R&D
spenders. The second source of data is a survey of
business enterprise R&D conducted annually by
the Office for National Statistics (Business Monitor, MA14). These data are based on a regular
questionnaire survey of all ‘the known larger
R&D performers plus a sample of smaller businesses’ (full details of the survey are provided in
the Introduction to Business Monitor). Additional
material related to mergers in the pharmaceutical
industry is drawn from the business press (Financial Times and The Guardian). My intention is to
O. Jones
use R&D data from these various sources to
provide an overview of trends in UK expenditure
on R&D, with particular focus on the pharmaceutical industry. I then examine the implications
of major restructuring in pharmaceuticals for
UK competitiveness. For example, it is calculated
that two companies, GlaxoSmithKline and AstraZeneca now account for more than 25% of all
business expenditure on R&D in the UK.
Postmodern (post-modern)
organizations
Cooper and Burrell (1988) identify modernism
with the Enlightenment project of greater reason
and rationality. In social science this view is
associated with thinkers such as Saint-Simon (see
Markham, 1964) and Comte (1853). Early modernists believed emphatically that technical
progress would lead to economic growth, and
economic growth would create social progress,
defined as: ‘change in social arrangements and
social parameters towards a state that appears to
be more desirable than the present state’ (Braun,
1994, p. 852). For modernists, innovation was the
primary source of economic and social progress.
Francis Bacon certainly envisaged human
liberation through science and technology:
‘a line and race of inventions that may in some
degree subdue and overcome the necessities and
misery of humanity’. (Rossi, 1968)
Innovations such as the spinning wheel (thirteenth century) had the potential to remove the
drudgery from everyday life. But, as the emergence of General Ludd’s army illustrates, technological change was seen by workers as a threat
to their livelihoods (Sale, 1996). Towards the end
of the nineteenth century technical change was
linked to the automation of manual work which
intensified deskilling of the labour process and
tighter managerial control (Blackburn, Coombs
and Green, 1985). Marcuse (1972) and Habermas
(1983) were both critical of the way in which
technology was used as a source of repression
in society. Marcuse suggested that technology
should be subject to the same ‘demystifying
critique’ that Marx applied to the market: ‘Like
market rationality, “technological rationality”
constitutes the basis for elite control of society’
The Outsourcing of Pharmaceutical R&D
(1972, p. 69). Critical theorists should investigate
the roots of this ‘totalitarian universe of
technological rationality’ and examine the alternatives for improving human lives. In organization theory, orthodox, functionalist approaches
have in the last 30 years been challenged by those
adopting more critical perspectives (Reed, 1996).
The rise of ‘radical organization theory’ represents
a rejection of the objectivism and rationalism
associated with modernism:
‘Part of the reason both critical theory and postmodern writings have now found fertile ground in
management studies is the decline and disillusionment of what is broadly referred to as modernist assumptions by both organizational theorists
and practitioners.’ (Alvesson and Deetz, 1996,
p. 191)
Attempting to define postmodernity or postmodernization is a ‘futile task’ because adherents
refute the language and logic of definition.
Instead, Parker (1992) identifies ‘concerns’ which
include rejection of the modernist project
founded on positivism, empiricism and science. A
postmodernist view is that it is impossible to
‘systematize’ events because conceptions of ‘out
there’ are continually renegotiated by the role of
language and discourse (Parker, 1992, p. 3). Both
Gergen (1992) and Clegg (1990) link the modernist project to organization analysis. Gergen (1992,
p. 211) argues that modernist principles of organization are embodied in such concepts as scientific
management, systems theory, contingency theory
and cybernetics while Clegg locates the key ideas
associated with modern organizations in the work
of Max Weber. For example, Clegg (1990) posits
that modernism was based on the increasing
functional differentiation found in large social
organizations. Writers such as Baudrillard (1981)
and Lyotard (1984) ‘assume a movement towards
a post-industrial age’ which involves an epochal
shift from modernism (Featherstone, 1991). Clegg
certainly defines the nature of postmodern organizations by outlining the key features of modern
organizations and, hence, distinguishes between
modernist and postmodernist epochs (see Hassard,
1994). Drawing on Baudrillard, Lyotard and
Derrida, Hassard (1993, p. 11) outlines a conceptual framework for postmodern organization
analysis which is underpinned by ‘five key epistemological notions’: representation, reflexivity,
writing, ‘difference’ and decentring the subject.
343
Hassard argues that Clegg’s work typifies the
epochal approach to postmodernism while Cooper
and Burrell’s various contributions are associated
with an ‘epistemological’ position. Clegg’s (1990)
view is that postmodern organizations have structural characteristics typified by post-industrial society or post-Fordism. Postmodern organizations
have de-differentiated structures, pursue nichemarketing strategies, employ multi-skilled workers
and make extensive use of flexible manufacturing
systems (FMS). Postmodernists reject the Weberian view that analysis should be concerned with
a functional assessment of organizational design
(Hassard, 1993, p. 17). Adopting a nominalist position, Cooper and Burrell (1988, p. 106) suggest that
postmodernism should focus on ‘the production
of organisation rather than the organisation of
production’.
Since the early 1980s academic interest has
shifted from Weberian archetypes of organizational development (Chandler, 1962; Mintzberg,
1979) to post-bureaucratic organizations (Heckscher
and Donnellon, 1994). The boundary which
separated mechanistic organizations from their
external environment has been rendered permeable by information technologies such as fax,
email, video conferencing and the Internet, which
have encouraged the creation of networks,
clusters and strategic alliances (Castells, 1996).
Internal boundaries have also been broken down
by cross-functional team-working which emphasizes the importance of organizational learning
(Clegg and Hardy, 1996). At the same time, the
typical employer–employee relationship based on
full-time, permanent staff has been replaced by a
variety of contractual arrangements described by
Atkinson (1984) as the ‘core-periphery’. The ‘core’
of permanent staff is protected from market uncertainty by workers who are employed on a range
of contracts varying from part-time to subcontracting. The core itself is shrinking as even experienced
R&D scientists are forced out of secure employment in large firms into the uncertainty of smaller
organizations which are similar to nineteenth
century entrepreneurial firms (cf. segmented
labour markets, Loveridge and Mok, 1979).
An increasing number of writers have examined the implications of ‘networking’ for the way
in which organizations operate. Some suggest
that the postmodern, networked organization
has few similarities with traditional Weberian
bureaucracies (Clegg and Hardy, 1996). Others
344
such as Ghosal and Bartlett (1993, p. 81) define
contemporary multinational companies as ‘networks embedded within a network’. While Ernst
(1994) argues that there are five network types
including the ‘technology cooperation network
which facilitate the acquisition of product design
and production technology, enable joint product
and process development and permit generic
scientific knowledge’ (quoted in Castells, 1996,
p. 191). Castells (1996, p. 192) in his ambitious
book which maps the economic, social and cultural
changes that have occurred with the onset of the
‘information age’, makes the following claim: ‘as
the process of globalization progresses, organizational forms evolve from multi-national enterprises to international networks’. Changes in the
way in which R&D is managed fits broadly with
this move towards post-bureaucratic (postmodern)
form of organization. In the mid-1990s Whittaker
and Bower (1994, p. 258) identified a trend for
collaborative R&D amongst pharmaceutical companies in the US and Europe: ‘drug companies
are becoming more dependent on external innovation’. According to Powell, Koput and SmithDoerr (1996) all stages of the innovation process
(discovery to marketing) are increasingly performing through some form of networking arrangement. There are many explanations for increased
networking including shared risk, market access,
complementary assets and speed to market (see
Jones, Conway and Steward, 2000). Powell et al.
(1996) focus on the argument that networking is
more prevalent in sectors (biotechnology for
example) where knowledge is developing rapidly
and sources of innovation are likely to be found in
the ‘interstices between firms’ which includes universities, suppliers and customers. Rothwell’s
(1992) ‘fifth generation model’ of innovation management emphasizes the importance of IT as a
facilitator of inter-organizational linkages (also see
Freeman, 1991). There is now widespread acceptance that firms must cooperate if the innovation
process is to be managed effectively: ‘With growing complexity, a focus on the role of innovation
networks will be more appropriate than the behaviour of specific firms in isolation’ (Tidd, 1997, p. 16).
The fragmentation of R&D
Adam Smith’s well-known example of pin manufacture in 1776 illustrates the links between
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knowledge, new technologies (machinery), techniques and the division of labour which helped
the UK to become the ‘first industrial nation’
(Deane, 1965). The social and economic dynamism of industrial society was strongly related
to the innovation of novel technologies which
encouraged the development of new products and
services on which modernity and the associated
consumer society were based. There have been
many attempts to develop an understanding of
the circumstances which influence innovatory
activity. Marx (1976) and Smith (1993) identified
clear connections between technical change and
economic growth. Although both recognized the
role of innovation in decreasing units costs and
opening new markets, the genesis of individual
technologies was regarded as independent of economic factors. Schumpeter (1934) first described
the process by which technical change and economic growth took place: entrepreneurs identify
potential markets and utilize existing pools of
knowledge to develop new products and services.
Improved economic activity occurs through the
interaction of many small innovative technologybased firms which sell ideas to larger firms with
the resources to exploit those inventions. Later he
acknowledged the importance of the institutionalization of R&D in stimulating technological
innovation. According to Schumpeter Mk. II (1943)
inventive activity was captured by the economic
system as the ‘bureaucratic management of
innovation’ replaced individual entrepreneurs.
Schumpeter also noted that innovations tended
to ‘cluster’, leading to uneven cycles of economic
activity which became linked to Kondratiev cycles
via the swarming effect of copies and imitations of
successful innovation.
Leading German chemical companies such as
BASF, Bayer and Hoechst were ‘among the first
firms in the world to organise their own professional R&D laboratories’ (Freeman and Soete,
1997, p. 89). The flow of graduate chemists from
German universities enabled these companies to
establish extensive R&D activities. By the beginning of the twentieth century the leading German
firms together with Swiss companies such as
CIBA, Geigy and Sandoz were dominant in the
world chemical industry. German firms formed
the IG Farben Trust in 1925 and it rapidly became
the world’s largest private R&D spender averaging 7% of turnover up to the Second World War.
IG Farben was also notable for close links with
The Outsourcing of Pharmaceutical R&D
universities: ‘management and the R&D departments were dominated by graduate chemists’
(Freeman and Soete, 1997, p. 112). Towards the
end of the nineteenth century technical innovation in the steel and chemical industries was
accompanied by a range of managerial innovations with the emergence of modern industrial
firms. GE and Westinghouse in the US and AEG
and Siemens in Germany provide examples of the
changes: the professionalization of management,
bureaucratic control replaced subcontracting,
the adoption of standardized information and
accounting procedures as well as the institutionalization of R&D. Modern society began with the
scientific heresies of Enlightenment thinkers such
as Copernicus and Galileo. The incorporation of
R&D activities into the ordered activities of
modern bureaucratic organizations was an attempt
to apply linear, rational thinking to the innovation
process. It is, however, possible to suggest that
innovation has always been a ‘postmodern’ activity. ‘If there were certainties about what lay in the
future then innovation would occur today rather
than tomorrow’ (Tsoukas, 1992). As Tsoukas
(1994, p. 774) points out: ‘For radical innovation
to be possible, the future ought to remain not only
unknown but unknowable.’
The institutionalization of R&D meant that
scientists and engineers in large industrial
firms fitted ‘snugly into the “core” category of
employees’ (Whittington, 1990, p. 1). Favourable
conditions of employment included pensions,
permanence of employment, good salaries and,
not least, considerable freedom from direct
managerial control. Whittington (1990) identifies
a fundamental restructuring of R&D, with
centralized laboratories being replaced by a
‘fragmented’ model which is responsive to client
needs. Extramural (subcontracted) R&D represented an increasing percentage of total R&D
spend, which was about 3% in mid-1960s and
increased to 10% in 1990. Whittington (1990)
argues that there are three possible explanations
for the shift to extramural R&D in smaller firms.
First, technologies became so complex that even
large firms had to subcontract certain tasks.
Second, the Age of Big Science (De Solla Price,
1986) ended and cheaper computing and communication technologies enabled smaller firms to
compete. Third, the so-called ‘SPRU argument’
(Freeman, 1982; Rothwell and Zegveld, 1985) in
which it is posited that small–large firm interaction
345
follows the Kondratiev long-wave cycle: large
firms carry out basic research; small entrepreneurial firms continue the pioneering work;
eventually, as an industry matures large firms use
their market power to exploit the new technological opportunities. Certainly, the relationship
between large pharmaceutical companies and
small biotechnology firms provides some support
for this argument (Whittaker and Bower, 1994).
The implicit technological determinism is dismissed by Whittington (1990), who suggests that
the changes must be located in wider socioeconomic changes of what he terms ‘the crisis of
organised capitalism’ (Lash and Urry, 1987).
Greater competition, an increasingly turbulent
environment, rapid technological change, severe
economic fluctuations, globalization and deregulation in world markets have increased consolidation in most sectors (Dicken, 1998). At the same
time, the dynamic, competitive nature of late capitalism has placed bureaucratic structures under
considerable pressure leading to downsizing,
decentralization and market-based relationships
to improve ‘flexibility’. Globalized markets have
had a destabilizing effect on large firms, and
ironically those with substantial commitments to
R&D have been particularly vulnerable. The
threatened takeover of ICI by Hanson eventually
led to the demerger of Zeneca, its pharmaceutical
division (Clarke-Hill, 1995). The 1980s also saw a
rapid rise in the number of leveraged buyouts as
small firms with little capital of their own took
control of large firms (Wierseman and Liebeskind,
1995). As a result of this ‘environmental turbulence’ senior managers sought to replace direct
bureaucratic control with indirect market-based
control. Much R&D work is highly discretional
and has always posed problems for managers
wishing to exert bureaucratic control (Pelz and
Andrews, 1976). R&D employees are also more
likely to identify with scientific and technological
goals rather than organizational goals (Raelin,
1991). Therefore, market mechanisms applied to
R&D work enable managers to control the
activities of scientific workers more closely. Even
where R&D has remained part of the firm,
managers have been forced to seek external
contracts as R&D has become isolated in smaller
units and exposed to pressures of the ‘market’:
‘R&D has become embroiled in a broader fragmentation of employment which, since the 1970s,
346
O. Jones
Table 1. Extramural and intramural R&D (£m)
Year
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1978
1972
1969
1965
Intramural
10 231
9659
9431
9254
9204
9069
8489
8135
8318
7650
2324
830
680
489
At 1995 prices
Extramural
At 1995 prices
%
9403
9102
9139
9254
9470
9466
9094
9003
9777
9733
7009
5744
5860
4812
1582
1490
n/a
1472
1331
1084
n/a
n/a
n/a
386
16.7
8.0
13.5
4.6
1454
1404
n/a
1472
1369
1131
n/a
n/a
n/a
496
50
51
116
45
15.46
15.43
–
15.90
14.46
11.95
–
–
–
5.04
0.71
0.89
1.97
0.94
has brought about a widespread replacement
of bureaucratic control by market disciplines.’
(Whittington, 1990, p. 2)
Data presented in Table 1 suggest that Whittington overstated the fragmentation of R&D because
extramural R&D was closer to 5% than 10% in
1990. Nevertheless, the trend that he identified
has certainly accelerated in the 1990s. As shown
in Table 1, intramural R&D expenditure increased
steadily between 1965 (£489 million) and 1998
(£10 231 million). However, when the figures are
adjusted to allow for inflation1 it can be seen that
spending on R&D reached a peak in 1990 (£9777
million at 1995 prices). In real terms, total expenditure fell in 1991/92, rose rapidly in 1994,
declined steadily until 1997 (the lowest figure for
five years) and then increased by 3.3% in 1998.
Extramural R&D expenditure follows a very
different trajectory: except for a brief rise to
almost 2% in the late 1960s, it remained less than
1% of intramural R&D spend until the early
1980s. In 1978 companies were still only spending
£16.7 million (£50 million at 1995 prices) externally, but by 1989 this had increased to £386
million (£496 million). In other words, between
1978 and 1989 the amount spent on extramural
R&D by UK companies increased almost ten
times in real terms. This trend continued in the
1990s and extramural R&D increased from
1
The GDP deflator calculated by the Office for
National Statistics is used to convert cash terms to real
terms with 1995 as the datum point (100) (see Business
Monitor MA14).
5.04% (£496m) of internal R&D in 1989 to
15.90% (£1472m) in 1995. Between 1995 and 1998
the outsourcing trend appears to have levelled off
at the 15.4% level.
R&D is highly labour intensive, and approximately 40% of total costs are attributable to wages
and salaries (Business Monitor, MA14). R&D
employment was 195 000 in 1981, but by 1997 had
declined to 139 000 (Table 2). When the total is
divided into scientists, technicians and administrators then the figures are revealing (see Jones,
1997). At the end of 1960s there were 67 000
scientists and engineers directly employed by UK
companies. The number grew steadily to 89 000 in
1989, levelled off in the early 1990s, and in 1998
increased to 92 000. In contrast, the number of
R&D support workers has decreased rapidly: in
1969, there were 72 000 technicians and 73 000
administrators, but by 1997 the numbers employed
in the respective groups had declined to 30 000
and 26 000. Interestingly, 1998 saw a significant
increase in the total number of R&D employees
(7.3%) over the previous year. Except for a slight
rise in 1993 this represents the first time in more
than 30 years that R&D employment in the UK
has actually increased. In addition, most of the
increase was accounted for by scientists and
engineers, although there was also a slight rise in
the number of technicians (Business Monitor,
1999).
In 1969 scientists and engineers represented
only 32% of total R&D employment, while technicians and administrators each accounted for
approximately 34%. By 1998, scientists and
engineers represented 61% of R&D employment
347
The Outsourcing of Pharmaceutical R&D
Table 2. Total UK R&D employment (000s)
Year
Qualified
scientists
and engineers
%
Technicians
%
Administrators
%
Total
1998
1997
1990
1981
1969
92
84
83
77
67
61
60
43
39
32
32
30
43
66
72
21
21
25
34
34
25
26
45
52
73
17
19
27
27
34
150
139
171
195
212
compared to 21% for technicians and 17% for
administrators. Although the total employed in
R&D began to decline from 1981 onwards, the
number of qualified scientists and engineers
(QSEs) continued to increase until reaching a
high point of 89 000 in 1988. There was a fall to
just 80 000 in 1991, but employment of QSEs then
levelled off at approximately 84 000, until the
increase of 8000 in 1998 (Table 2). The automation of routine activities and use of IT-based
retrieval systems for journal articles reduced
requirements for technicians and administrators.
Even with the increased numbers in 1998, total
expenditure on R&D ‘labour’ rose by less than
10% real terms since the mid-1980s. In the same
time period, capital costs increased by 18% and
‘other costs’ (including IT services) rose by 22.6%
(Table 3).
Table 3. Change in R&D expenditure: actual and real (£m)
Total
£ = 1995
Capital
£ = 1995
Labour
£ = 1995
Other
£ = 1995
1985
1998
5122
8072
515
811
2164
3410
2442
3850
10 231
9403
1041
957
4053
3725
5137
4721
% change
16.4
18.0
9.2
22.6
R&D and UK competitiveness
Stock-market pressure forces UK companies to
maintain profits and dividends, which emphasize
the short-term over the longer-term (Ingham,
1984; Hutton, 1995). This pressure is translated
into a reluctance to invest in employee training,
capital stock and R&D (Kitson and Michie, 1996;
Patel and Pavitt, 2000). Freeman (UK R&D Scoreboard, 1996) agrees that technological investment
is vitally important in determining economic
growth. New technologies increase the range of
products and services, while process innovation
improves efficiency and quality. Increased R&D
intensity is crucial in improving the long-term
competitive position of national economies. Unfortunately, as Freeman (1996) points out: ‘R&D
trends in the Scoreboard since 1991, compatible
with other indicators, leave no room for complacency in the UK’. In 1991 the leading UK R&D
spenders were on average investing 2.1%, compared to approximately 4.0% invested by leading
companies in OECD nations. UK-listed companies
have increased R&D spend during the 1990s but
still failed to close the gap with their main competitors in other industrialized countries (Table 4).
As well as the gap with international rivals,
another problematic aspect for the UK is the
disproportionate importance of R&D spend in
the pharmaceutical industry. The pharmaceutical
industry in the UK, as well as globally, has been
subject to ‘takeover fever’ in the 1990s (Green,
Table 4. R&D spend of top 18 companies (%)
1998
1997
1996
1995
UK
France
USA
Germany
Japan
Sweden
2.9
2.5
2.3
2.2
4.0
4.0
4.0
4.0
5.8
4.9
4.3
4.0
4.3
4.3
4.7
4.0
4.8
4.8
4.9
5.0
7.5
7.5
7.4
7.0
348
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1995). In 1994 Boots sold its R&D activities to
BASF of Germany and this was followed by
Fisons’s sale of their R&D activities to Astra of
Sweden. Subsequently, Fisons was taken over by
RPR of France and in December 1998, Astra and
Zeneca agreed to merge with the immediate
announcement of 6000 job losses (The Guardian,
10 December 1998). But the most significant consolidation began with Glaxo’s contested acquisition of Wellcome in 1995. This was followed, in
January 1998, by GlaxoWellcome’s abortive bid
for the other major UK-based pharmaceutical
company SmithKline Beecham. SmithKline
Beecham was itself formed by an earlier merger
of the US company SmithKline and the leading
UK health-care company Beecham (see Jones,
1996). Despite considerable acrimony between
the two CEOs (Richard Sykes and Jan Leschly) a
merger was finally announced in January 2000.
The combined company, Glaxo SmithKline, now
accounts for almost 59% of all pharmaceutical
R&D spend and 19% of total R&D expenditure
in the UK (the inclusion of AstraZeneca means
that two companies are responsible for 25.6% of
all UK R&D spend). Perhaps of more significance than the sheer scale of the new company is
GlaxoWellcome’s record since their 1995 merger.
A major driving force for increased consolidation
in the industry is the opportunity to economize on
R&D. Since 1995 GlaxoWellcome has reduced its
total UK R&D expenditure by 10.9% in real terms
(£1200 million to £1069 million). This cutback by
the UK’s leading company has considerable implications for the future of high-technology manufacturing activities, particularly as pharmaceuticals
(Table 5) is the only technology-based sector
which matches international averages in R&D
expenditure (UK R&D Scoreboard, 1999).
The extent of UK reliance on pharmaceutical
R&D has been accentuated by threats from
Richard Sykes (GlaxoWellcome CEO) to switch
the focus of R&D spending from the UK to the
USA (see below). Factors which are seen to be
Table 5. International R&D intensities 1998 (%)
Sectors
UK
International
Pharmaceuticals
Software/IT
Chemicals
Electronics
Engineering
15.0
4.9
1.7
3.2
1.6
13.5
13.6
6.1
5.3
3.3
creating a ‘negative’ environment for pharmaceutical R&D include government attempts to control
NHS spending through the ‘limited list’; longer
and more complicated testing of drugs leading to
a decline in effective patent life; and competition
from generic drug manufacturers (Sharp, 1991).
New techniques, particularly biotechnology, are
regarded as precursors of a second pharmaceutical revolution which has substantial implications
for the organization of pharmaceutical R&D
(Jones, 1996). Greater emphasis on biotechnology,
as well as the adoption of combinatorial chemistry (Wilson, 1999) and microassay (Hicks, 1999),
are changing the activities of R&D scientists, as
pharmaceutical companies move away from traditional compound-screening techniques (della Valle
and Gambardella, 1993; Hopkins, 1998; Randle
and Rainnie, 1994). Real expenditure on R&D
did increase in 1998 for the first time since 1994
(Table 1) and this was also reflected in a rise in
the number of scientists and engineers (Table 2).
John Battle, then Minister for Energy and Industry,
points out in the UK R&D Scoreboard, 1999 that
there were a number of sectors which increased
expenditure by ‘sizeable amounts’ and these
included health (65% increase) and perhaps more
surprisingly engineering and machinery (12%).
At the same time, Battle displays a remarkable
complacency with regard to the drug industry
because, he claims, intensity figures ‘suggest the
UK is a preferred region in which to make R&D
investment’.
Intramural or extramural?
A recent study reported on changes to the management of R&D amongst the leading UK
pharmaceutical companies (Jones, 1996). During
the early 1990s the use of subcontract and agency
staff was concentrated on mundane R&D activities. By the mid-1990s senior managers were
beginning to see R&D as another ‘make or buy’
decision rather than a core activity. The HR
Director of Pfizer which, ironically, has massively
increased its UK expenditure on R&D, summed
up the changes:
‘I have a vision of one eminent scientist remaining
in the company while all other activities are in the
periphery. I don’t like this trend but it might
become a way of life.’
349
The Outsourcing of Pharmaceutical R&D
According to government statistics (Business
Monitor, 1999) between 1993 and 1998 pharmaceutical extramural R&D spend rose from £253m
to £555m (Table 6) which in real terms was an
increase of more than 90%. The most recent
figures confirm that extramural R&D rose by
16% in 1998 but the trend for overseas spend to
increase and UK spend to decline was reversed.
In real terms extramural spending in the UK increased by 55% (£71m) while overseas expenditure declined by 4.9% (£14m). Significantly, the
proportion of pharmaceutical extramural R&D
to total extramural expenditure (see Table 1)
increased from 23% in 1993 to 35% in 1998.
Extramural R&D (Table 1) rose from £386m in
1989 to £1582m in 1998 (£496m to £1454m in real
terms). During that period the proportion of
overseas extramural spending grew slightly from
approximately 33% to 35.3%. Therefore, £558m
(Appendix 1) is being spent abroad, which
exceeds the R&D spend of all but the top five
UK spenders. In real terms, overseas expenditure
rose from £164m in 1989 to £513m in 1998
(Appendix 1). Assuming a total cost per employee of £80,000, this means that almost 4500
knowledge-intensive jobs (scientists and technicians) were lost to the UK during the 1990s.
Government statistics do not provide information
on the nature of overseas spend by UK companies but it is possible to estimate the main
destination of increased expenditure within the
UK. Extramural R&D rose from £258m (£332m)
in 1989 to £1024m (£941m) in 1998 which in real
terms was an increase of £609m (Appendix 1).
Between 1989 and 1998, R&D expenditure in
Higher Education Institutes (HEIs) rose from
£1689m (£2170) to £3040 (£2794) which was a real
terms increase of £624m (Appendix 2). According
to government figures, business enterprises funded
approximately £221m of the total 1998 R&D
expenditure in HEIs (Appendix 3). Government
funding of R&D in HEIs decreased from more
than 82% in the mid-1980s to 64.4% in 1998. The
proportion of business funding of HEI R&D did
increase between 1985 and 1990 (5.2% to 7.6%)
but as a percentage remained stable throughout
the 1990s (Appendix 3). In fact, government withdrawal from the funding of HEI R&D was
replaced by private non-profit (charitable) organizations (6.4% to 15.2%) and overseas companies
(2.1% to 9.1%) which both increased by substantial amounts between 1985 and 1998 (Appendix 3).
Therefore, I suggest that most of the increase in
UK extramural R&D expenditure is going to
independent research and technology organizations (RTOs) rather than to HEIs. Kenward, in
the UK R&D Scoreboard, 1996 argued that such
companies were obtaining more work as a result
of greater enthusiasm for outsourced R&D
(see Howells, 1999; Naude, 1999). Between 1992
and 1994 AIRTO (Association of Independent
Research and Technology Organisations) members
increased from 34 to 40. AIRTO members carry
out contract R&D for 19 of the top 20 UK R&D
spenders. In addition, there are now extensive
links between the pharmaceutical companies and
biotechnology firms. In the mid-1990s Zeneca
indicated that there would be much more outsourcing of their research component of R&D in
the future (Ward, 1994).
Even though in 1998 there was a considerable
increase in total R&D expenditure (£572m) in
real terms the figure was still lower than the
£9777m (at 1995 figures) spent in 1990. As a consequence, gross domestic expenditure on R&D as
a proportion of GDP has fallen from 2.12% in
1990 to 1.81% in 1998 (Office for National
Statistics, 2000). The UK is the only major industrialized country in which R&D spend takes a
declining share of GDP. This is partly explained
by less emphasis on defence-related R&D, which
fell from £1760m in 1990 to £1343m in 1997 (in
real terms £2180m in 1990 to £1265m in 1997). In
1998 the trend appears to have been reversed
with an extra £190m spent on defence-related
R&D, giving a total of £1533m (a real increase of
Table 6. Extramural R&D in UK pharmaceuticals (£m)
1998
1997
1995
1994
1993
Total
1995 prices
UK spend
1995 prices
Overseas
1995 prices
555
464
428
355
253
510
439
428
367
268
260
162
170
167
103
238
153
170
173
109
295
302
258
188
150
271
285
258
194
159
350
11%). As illustrated in Appendix 2, the reason for
the reduction in R&D expenditure is the declining proportion spent by private-sector companies
(business expenditure on R&D: BERD) which
fell from 69.3% of total expenditure in 1990 to
65.8% in 1998. In contrast, the proportion of
R&D expenditure carried out by HEIs increased
from 15.3% in 1989 to 19.6% in 1998 (Appendix
1). As discussed above, this rising proportion of
HEI-performed R&D is being funded by charities
and overseas companies. Unfortunately, this does
not signify that research carried out in higher
education is any healthier than business-funded
R&D. A recent report on the state of publicly
funded research (Salter et al., 2000, p. 11) confirms that despite high levels of productivity there
are serious weaknesses: ‘The UK has the 16th
lowest growth rate in higher education R&D
among the leading twenty-one OECD countries’.
Innovation and post-modern
organizations
While no UK pharmaceutical company can yet be
described as ‘post-modern’ there are some traditional manufacturing firms in which managers
have initiated a shift from bureaucratic forms.
By the mid-1990s 3M was a $15 billion company
with 70 000 employees and over 60 000 different
products (O’Reilly and Tushman, 1997). New
skills and new technologies have been regularly
acquired to complement traditional knowledge
of adhesives and abrasives (Quinn, 1992). Roberts
and Berry (1997) describe the way in which
internal and external venturing continually renew
3M’s activities. The so-called ‘15% rule’ provides
technologists with the opportunity to pursue their
own personal projects, and multiple sources of
funding mean that R&D employees are not reliant on approval from immediate superiors. Senior
managers have also established a mechanism
which is described as the ‘venture career path’.
The objective is for successful project teams
to become ‘separate business units, then profit
centres and finally even divisions’ (O’Reilly and
Tushman, 1997, p. 213). The ability of 3M to continually reinvent itself is also linked to the
requirement for 30% of profits in each strategic
business unit to come from products introduced
in the last four years. However, 1995 almost
certainly represented a high point in terms of
O. Jones
employment as this was ‘a momentous year in
3M’s 93 year history’ (Denton and de Cock, 1997,
p. 74). Declining profits encouraged senior managers to restructure the company, with data storage and imaging systems becoming an independent
company, and the audio and videotape businesses
being discontinued (Denton and de Cock, 1997).
One of the most widely-quoted examples of an
industrial firm undergoing a major transformation is ABB, the Swiss–Swedish engineering
company (Barham and Heimer, 1998; Ruigrok
et al., 2000). ABB was created in 1987 by the
merger of two heavy engineering companies: Asea,
a Swedish firm formed in 1890, and Brown Boveri,
a Swiss firm founded in 1891. ABB is organized
into 1200 small businesses, which are sub-divided
into 4500 profit centres, each consisting of 50
employees. ABB’s first CEO, Percy Barnevik,
created a company without a geographic centre.
The Swiss headquarters employs only 100 professionals to control an organization with a $25 billion
turnover and 240 000 employees. Financial results
are reported in US dollars and the official company language is English (Taylor, 1997). Gassman
and von Zedtwitz (1997) agree that ABB, along
with Philips (The Netherlands), Ericsson (Sweden)
and Roche (Switzerland), has been a pioneer in
the internationalization of R&D. The authors also
suggest that there is a very strong correlation
between technological intensity and R&D expenditure abroad (Gassman and von Zedtwitz, 1997,
p. 5). Chesbrough and Teece (1996, p. 65) argue
that the ‘virtual organisation’ which is ‘decentralising, downsizing and forging alliances to pursue
innovation’ is based on the premise that bureaucracy is bad and flexibility is good. The authors
accept that some ‘virtual’ firms such as ABB have
become successful, but suggest that there are many
less publicized failures: ‘we believe the virtues of
being virtual have been oversold’ (Chesbrough
and Teece (1996, p. 65). A large-scale survey of
448 European firms found little evidence for
radical structural change (Ruigrok et al., 1999).
The research established that although 30% of
firms had reduced layers, functions remained
important with greater emphasis on ‘project-based’
structures. Furthermore, 53% of companies noted
an increase in outsourcing, but only 10% actually
outsourced R&D. The authors conclude:
‘we have seen the emergence of certain internal
network characteristics across Europe, yet our
351
The Outsourcing of Pharmaceutical R&D
results hardly warrant the use of far-fetched
claims on the rise of the “new organisation”.’
(Ruigrok et al., 1999, p. 59)
Do trends towards the externalization of R&D
mean managers in UK pharmaceutical companies
are implementing radically new organizational
structures? A number of observers suggest that
the emergence of flexible organization marks an
epochal break which signals the end of bureaucracy (Clegg, 1990; Hassard, 1994). German
chemical firms set the trend for the institutionalization of R&D, which was an important feature
of the large industrial firms which dominated the
Fordist era. But even today, GM and Ford remain
the world’s largest spenders on intramural R&D
with a combined total of more than £8.5 billion a
year (UK R&D Scoreboard, 1999). In the UK
there was a steady increase in intramural R&D
until 1990. Subsequently, spending on internal
R&D has levelled off, while extramural spending
has risen from 5% to 16% of total R&D since
1989. Although UK pharmaceutical companies
are extremely conservative, increasing consolidation has been combined with a steady rise in the
proportion of external R&D. This is partly
explained by the growing importance of biotechnology in pharmaceuticals, which is mostly boughtin. At the same time, mergers have meant that
senior managers have found it relatively easy to
economize on R&D costs by eliminating areas of
overlap. All major UK mergers have been accompanied by the announcement of substantial cuts in
R&D employees: GlaxoWellcome, 1800 R&D
staff; AstraZeneca, 6000 jobs; GlaxoWellcomeSmithKline, 15 000 jobs (see below).
Pharmaceuticals is one of few manufacturing
sectors in which the UK is internationally
competitive. However, the vigorous domestic
competition which typified the industry until the
late 1980s was, by the late 1990s, concentrated in
a GlaxoWellcome and SmithKline Beecham duopoly. Following the merger with Astra, Zeneca
still has a strong UK presence but in the longterm the balance is likely to switch to Sweden.
Even greater concentration was threatened
in January 1998 when GlaxoWellcome and
SmithKline Beecham agreed a merger which
would have been the largest in corporate history.
Disagreement between the two CEOs (Richard
Sykes and Jan Leschly) about their respective
roles in the new company led to a collapse in
negotiations. The deal was favoured by city
analysts, not least because of the economies to
be gained by reducing administrative and R&D
staff. Subsequently, GlaxoWellcome’s share price
increased by £3.40 to £19.68 on 27 January 2000
which put 68 points on the FTSE index (The
Guardian, 28 January). Institutional investors
encouraged Sykes to launch a contested bid for
SmithKline Beecham (Buckingham and Finch,
1998). Early in January 2000 GlaxoWellcome and
SmithKline finally announced a £110 billion deal
to create the world’s largest pharmaceutical firm.
It was anticipated that the merger would lead to
15 000 (2000 in the UK) of the 110 000 staff losing
their jobs (The Observer, 16 January 2000). Unions
were particularly concerned about threats to R&D:
‘Both companies have big US operations, which
gives them every reason and excuse to phase out
their (R&D) operations in the UK’ (MSF statement quoted in The Guardian, 18 January 2000).
The threat was made more explicit by news that
GlaxoSmithKline’s operational headquarters
would be in the US (Financial Times, 18 January
2000). This followed a dispute between GlaxoWellcome and the National Institute for Clinical
Excellence (NICE) which was set up by the
Labour government in 1997 to evaluate the efficiency and efficacy of new drugs. NICE rejected
GlaxoWellcome’s new treatment for influenza
(Relanza). Richard Sykes wrote to Frank Dobson
(Health Secretary) and Tony Blair (Prime Minister)
warning of ‘potentially devastating consequences
for the future of the British-based pharmaceutical
industry’ (The Observer, 10 October 1999).
Conclusions
As discussed above, the pharmaceutical industry,
globally as well as in the UK, is undergoing a
series of major mergers. It is also widely recognized that high-technology companies must be
part of the global knowledge network if they are
to remain competitive (Castells, 1996; Ghosal and
Bartlett, 1993; Jones, Conway and Steward, 2000;
Powell, Koput and Smith-Doerr, 1996). At the
same time, merged companies generally seek to
reduce costs by economizing on R&D expenditure. Managers in major drug companies have
generally not invested directly in biotechnology,
preferring instead to buy-in knowledge from
smaller firms. Pharmaceutical companies form
352
the nodes in large-scale scientific networks which
include biotechnology companies as well as universities (Albertini and Butler, 1995; Whittaker and
Bower, 1994). Extensive use has also been made
of new information technologies to aid internal
communications as well as helping improve access
to information from external sources. Also, as
described above, R&D, which until recently has
been a core activity within the pharmaceutical
industry, is increasingly bought-in. Therefore, the
internal structures of large drug companies may
still be recognizably Weberian but they have
adopted many of the features of postmodern
organizations described by Clegg (1990).
Whatever the eventual form of the restructured
pharmaceutical industry the trend is for managers
to view R&D as a ‘make or buy’ decision rather
than as a core activity. While it would be an
overstatement to suggest that pharmaceutical
companies will in the future buy-in all their R&D
there is certain to be a substantial reduction in the
number of scientists directly employed by leading
firms. Rationalization might be viewed as a logical
response to the increasingly uncertain environment which confronts pharmaceutical firms. A
more cynical view would be that UK capitalists
are reverting to type by reducing R&D spend and
eliminating competition by hostile takeover. UK
and US companies are most likely to suffer from
a contraction of the pharmaceutical industry
because capital structures facilitate takeovers in a
way that is virtually unknown in other countries.
Until very recently, German and Japanese companies were not subject to takeovers by predators
such as Hanson, who built a massive conglomerate
based on reduced investment and asset stripping
(Hutton, 1995, pp. 163–164). At a broader level, a
reduction in R&D spend by the pharmaceutical
companies will have an impact on the UK’s
schools, universities and science base. The availability of high-quality scientists has helped make
UK-owned companies successful and attracted
inward investment by foreign-owned companies.
A Toshiba representative, in a submission to the
House of Lords Select Committee on Science and
Technology, stated:
‘The most attractive feature of UK science which
lends itself to collaborative research with a multinational corporation is the strength of basic,
curiosity-oriented research and its associated
infrastructure.’ (Wild and Lackie, 1995)
O. Jones
The UK’s dependence on the pharmaceutical
industry for R&D activity has been accentuated
by the GlaxoWellcome–SmithKline merger. As
discussed above, this company now accounts for
60% of all pharmaceutical R&D expenditure and
almost 20% of total R&D spend in the UK.
GlaxoSmithKline poses a threat to the health of
UK bioscience in two ways: first, since the GlaxoWellcome merger in 1995 there has been a steady
decline in R&D spend and second, senior managers led by Richard Sykes have increased their
threats to move R&D to the US because of the
‘unfavourable’ climate in the UK. Association of
the British Pharmaceutical Industry (ABPI)
President, Bill Fullager argued that there had
been an increase in UK R&D jobs between 1996
and 1998 (mainly as a result of investment by US
company Pfizer) but admitted that the UK was
becoming less attractive for clinical trials. Michael
Bailely of GlaxoWellcome stated that there had
been a reduction in UK manufacturing capacity
because of ‘consolidation and rationalisation’.
Countries with ‘favourable’ tax regimes such as
Ireland, Singapore and Puerto Rico were becoming increasingly strong competitors (Financial
Times, 26 April 2000). Therefore, it is argued, the
present policies of major UK pharmaceutical
companies threaten the foundation of their recent
success and will eventually have negative implications for the UK economy as whole.
Postmodernity is appealing to those adopting a
critical perspective because, as Bourdieu (1984)
points out, it provides a new language that gives
the impression of pushing forward disciplinary
boundaries. This gives organization theory ‘an
image and sense of excitement singularly lacking
in the present academic community’ (Parker,
1992, p. 13). Postmodernist rhetoric avoids confronting the realities of political economy and the
circumstances of global power:
‘Postmodernism has us accepting the reifications
and partitionings, actually celebrating the activity
of maskings and cover-up, all the fetishisms of
locality, place or social groupings, while denying
any meta-theory which can grasp the politicaleconomic processes that are becoming ever more
universal in their depth, intensity, reach and
power over daily life.’ (Harvey, 1989, p. 117)
Harvey (1989) is critical of central figures in the
project of postmodernity such as Lyotard and
Derrida for their naïvety and ‘political silence’.
353
The Outsourcing of Pharmaceutical R&D
Parker (1995, p. 553) admits that while he once
saw postmodernism as representing the cutting
edge of social theory his views have changed:
‘Postmodernism is a dangerous and disabling set
of ideas for critical organisational theorists to
adopt’. Neither Harvey nor Parker believe that an
emancipatory project is well-served by abandoning ideas of progress. The distinction between
modernism and postmodernism is related to
views about whether or not we can have ‘all the
answers about organizations and organizing’:
modernists answer ‘yes’ while postmodernists
(Lyotard) and critical modernists (Habermas)
answer ‘no’ (Parker, 1995, p. 554). The allencompassing theories of Marx, Weber and Freud
have been the focus of postmodern attacks but
grand narratives are important ‘because that is how
we do theory in both practical and social arenas’
(Parker, 1995, p. 557). While there are many views
on the nature of ‘globalization’ it is straightforward to empirically verify that the movement
of goods, services, cash, labour and even organizations across national boundaries has increased
in scale over the last 30 years (Dicken, 1998). It
may be possible, and in some circumstances even
useful, to describe the new organizational forms
as postmodern, but real critical understanding of
globalization requires a metatheoretical approach.
For example, postmodern forms of organization
are similar to the system of subcontracting that
typified British industrial organizations well into
the twentieth century (Pollard, 1965).
The emergence of new technologies was strongly
linked to the project of modernism. Rationalism
gradually replaced religion as the basis around
which society was organized because scientists
were able to give better explanations of the way
in which the world operated than priests. High
quality optics meant Galileo could demonstrate
that the earth revolved around the Sun rather
than vice versa. Navigational technologies enabled
Columbus to discover the New World and set in
motion the era of modern imperialism. This paper
is intended to raise a number of questions about
the state of R&D investment in the UK rather
than provide definitive answers. The 1998 data
provides some encouragement for those interested in maintaining the UK’s commitment to
high-technology industries with something more
tangible in terms of inputs (jobs) and outputs
(profits) than dot.com firms. It will be interesting
to see if the 1998 increase in R&D expenditure is
sustained in subsequent years. On a more
negative note, increasing consolidation in the UK
pharmaceutical industry, given GlaxoWellcome’s
declining R&D spend has massive implications
for the UK’s science base, particularly because
GlaxoSmithKline now represents such a large
proportion of R&D expenditure, combined with
the threat that senior managers in the merged
company seem determined to switch the R&D
focus to the USA.
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Appendix 1: Extramural R&D expenditure (£m)
Total
£ = 1995
UK
£ = 1995
Overseas
£ = 1995
1989
1993
1995
1997
1998
386
496
258*
332
128*
164
1084
1153
725
768
359
380
1472
1472
1008
1008
463
463
1490
1404
976
920
514
484
1582
1454
1024
941
558
513
Note: * These are estimates based on 1993 proportions as actual figures are unavailable.
356
O. Jones
Appendix 2: R&D by sector (£m in cash terms)
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
Government
%
HEI
%
BERD
%
Other
%
Total
2074
2011
2070
2043
2041
1928
1846
1757
1566
1534
1360
13.3
13.6
14.3
14.4
14.6
14.2
14.5
14.5
13.1
13.9
13.6
3040
2893
2792
2696
2623
2312
2129
2020
1873
1689
1575
19.6
19.6
19.3
19.0
18.7
17.0
16.7
16.7
15.6
15.3
15.7
10 231
9657
9431
9254
9204
9069
8489
8135
8318
7650
6922
65.8
65.4
65.2
65.3
65.5
66.9
66.7
67.1
69.3
69.2
68.9
204
190
177
177
168
232
224
219
234
196
179
1.3
1.3
1.2
1.2
1.2
1.7
1.7
1.8
1.9
1.8
1.8
15 548
14 758
14 470
14 172
14 046
13 541
12 689
12 131
11 991
11 058
10 035
Appendix 3: R&D performed in HEIs according to source of funds (£m)
Government
Research councils
HE Funding councils
HEIs
Business enterprise
Private non-profit
Abroad
Total
HEIs (1985)
%
HEIs (1990)
%
HEIs* (1998)
%
961
–
–
49
61
75
24
1170
82.1
–
–
4.2
5.2
6.4
2.1
1376
–
–
84
142
55
29
1873
73.5
–
–
4.5
7.6
9.5
4.9
177
697
1085
122
221
463
275
3040
5.8
22.9
35.7
4.0
7.3
15.2
9.1
Note: * Total of Government and two research councils is £1959m (64.4%).