This document analyzes the short-run economic factors of building a pharmaceutical manufacturing plant in either Poland or India. It summarizes fiscal and monetary policies, trade policies, wages/labor, and political environment for each country. Poland provides more stability and ease of access to European markets due to EU membership. However, India has lower costs. Overall, Poland may be preferable due to the advantages of operating within the EU single market and its plans to adopt the Euro.

1. BioCo
Overseas Pharmaceutical Manufacturing Plant Analysis
Short-Run
(India and Poland)
Contents:
I. Executive Summary- Competitive Advantages or Disadvantages
II. Background
III. Important Short-Run Economic Factors
a) Fiscal Policy
b) Monetary Policy
c) Trade Policies
d) Wages and Labor
e) Political Environment
Gold Cohort
Rajeev Kalavar
Jordan Lindsey

2. Jeff Lo
Ian Ranahan
Brian Soby
Susan Song
Sanjay Srivastava
I. Executive Summary- Competitive Advantages or Disadvantages
Short-Run
Factors Poland India Comments
Poland: Prudent policy should allow future adoption of the Euro providing a
natural hedge against projected revenues. Sound policy points to continued
Fiscal &
growth and stability.
Monetary
India: Beneficial tax cuts would reduce construction costs but may be short
Policy
lived. The threat of high inflation and currency fluctuations create potential
risk."
Poland: Being part of EU allows trade with other EU member states with
relative ease. The "Intra-Community" trade laws provides zero-rated VAT and
Trade easy market access into the EU.
Policies
India: Trade with EU may become more favorable based on FTA discussions
that began in 2007. Although, timeframe is still uncertain.
Poland: Low wages for Europe with incoming supply of labor. Increasing
Wages & wages for skilled labor.
Labor India: Lower wages but growing at a very fast rate. Compeition for skilled
labor.
Poland: Least feeble in Eastern Europe. We expect liberalization policy will
continue under the current and next administration, the chief driver being
Political integration into EU.
Environment India: The results election are difficult to predict; Concessions made to the
Communist and Regional parties could have substantial detrimental impacts
by creating stricter labor regulations and a pro-union bias.
Overall
II. Background

3. BioCo, a biopharmaceutical drug developer, has just received FDA approval to sell a new Hepatitis B
drug, HepCure, in the United States. Based on on-going positive efficacy studies versus major
competitors and looming approval in the EU, BioCo expects production requirements to grow
drastically over the next 10 years and is looking to build a manufacturing plant in the developing world
to be the primary worldwide supplier in meeting this future need.
BioCo decided to produce in a developing country as opposed to a developed country in order to take
advantage of lower production costs relative to competitors. The management of BioCo believes this
cost savings will be a significant source of competitive advantage in the future as new products are
brought to market and the profit margins on future drugs declined due to increased competition from
generic drug makers. BioCo has narrowed its decision down to two countries in which to build its new
production plant: Poland and India.
III. Important Short Run Economic Factors
a. Fiscal Policy - Government spending and taxation:
Poland
Fiscal policy is expected to tighten in Poland in order to meet criterion for joining the EuroZone. In
2008, Poland ran a current-account deficit of 5.4% as a percentage of GDP. Analysts project the deficit
spending to decrease to 3.7% of GDP by 2013. The trend towards decreased deficit spending may
dampen overall economic growth as shown by a decrease in expected real GDP growth.
Source: http://www.economist.com/countries/Poland/profile.cfm?folder=Profile-Economic%20Data
In looking to build a manufacturing production facility, the decrease in government spending should
be beneficial as it will help keep inflation down and should free up resources in the labor pool. As
BioCo anticipates hedging the costs required to build the production facility, no, or little, adverse
effects should be felt from the potential appreciation in the Zlotty over the next few years.

4. Poland seems to be moving towards a flat tax with an end goal of harmonizing personal income taxes
(PIT) with the corporate tax rate of 18%. Reducing taxes should help to spur growth by providing
consumers with more disposable income. As the decrease in taxes is accompanied by a decrease in
deficit spending, the shift in dollars from the government to its citizens should help employ capital
more effectively. The decrease in taxes should also hopefully entice more workers to enter the labor
pool, which should drive competition.
Overall, as the on-going costs of operating a manufacturing plant are minimal compared to the initial
build-out increases in the standard of living and the associated wage increases do not have a huge
impact on the decision to build the plant in Poland. HepCure will initially be patent protected so will
have high margins. Accordingly, a 20-30% increase in real incomes would not have a significant impact
on profitability. As the patents on HepCure expire in 10-15 years, BioCo will need to consider how to
utilize the Polish plant and if it makes sense to outsource development of HepCure if costs in Poland
are too high.
India
In response to the financial crisis, the Indian government has made major tax cuts and taken on a large
amount of debt in order to fund stimulus and other packages. This brought the deficit level from the
current 3.17% of GDP in 2007-2008 to its current rate of 12% of GDP. In February of 2009, Standard &
Poor cited this large deficit when they warned of the possibility of future downgrades to India’s credit
rating, an event that would drop them below their current BBB rating and into the junk ratings.
(Srivastava 2009)
Source: http://www.economist.com/countries/India/profile.cfm?folder=Profile-Economic%20Data
Among India’s tax cuts is a 4% cut to the central value added tax (CENVAT) that would benefit BioCo
during the construction of the plant by reducing the cost of steel and other materials costs.
(Fabrication 2009)
b. Monetary Policy – Inflation and Interest Rates:
Poland
Inflation in Poland has risen recently from 1% in 2006 to 4% in 2008 to the mid-3% range thus far in
2009. The rise is due to strong GDP growth and an increase in food and energy prices as the Zloty
depreciated against the Euro. An increase in the inflation rate has several short-term implications. If
the National Bank of Poland, NBP, is not able to bring inflation down to the 2.5% target, the price
stability required to join the EU may not be attained. An inability to join the EU means that Poland
would not adopt the Euro or may delay adopting the Euro.

5. Should Poland fail to adopt the Euro, BioCo will not have a natural hedge against expenses incurred in
Poland following plant completion. Exposure to this currency risk may have significant implications
should the Zlotty appreciate significantly against the Euro (where revenues will be raised). Based on
the historical performance of the Zlotty, BioCo does not expect that the Zlotty would appreciate
significantly against the Euro without adopting as it is the stated intent of the Polish government to
join the EuroZone and have a stable currency.
In order to keep inflation in check, the NBP will need to adjust interest rates to contract the money
supply. The rise in interest rates will make the cost of borrowing higher; however, as the
manufacturing plant is being funded through monies raised in the US, BioCo does not expect and
increase in the costs of the initial build-out from the tightening of monetary policy. Indeed, the hedges
that will be in place to cover the initial costs of the plant build-out should protect BioCo from any
adverse interest rate costs. After plant completion, Poland should be on the Euro and BioCo will be
subject to the Euro versus dollar variance in FX rates.
India
The banking sector in India is
largely government owned and
subject to a number of lending
requirements that prevent it
from operating efficiently and
servicing the capital needs of
the market. To assist with
alternate funding, the
government has taken a
number of steps since 2000 to
open the capital account and
allow foreign investment. As
the Indian economy grew at accelerated rates in the mid-late 2000’s, large capital inflows occurred as
foreign investors channeled money into the Indian economy. Most of these inflows have come in the
form of external commercial borrowing (ECB) and portfolio investment due to the increased
liberalization of these flows versus foreign direct investment, which is more of a politically difficult
area. (Economist 2008)

6. Since 1991, India has maintained a managed float policy for the Rupee. The large inflows have put
upwards pressure on the Rupee and have led to a series of interventions by the Reserve Bank of India
(RBI) in an attempt to keep the Rupee from appreciating significantly against the dollar. Foreign
exchange reserves grew at a rapid pace to a peak of approximately $315 billion in May of 2008. The
partially sterilized interventions by the RBI had also resulted in an increased money supply and
inflationary pressure, despite their attempt to actively withdraw liquidity from the market. Other
inflationary factors such as high energy costs had added to this pressure and created significant
consumer price inflation in spite of the high interest rates set by the RBI.
In 2009, the global financial crisis caused the RBI to switch gears and intervene to buffer the falling
Rupee. Foreign currency reserves fell $65 billion to their current level of approximately $250 billion as
the RBI attempted to remove excess Rupees from the market. Consumer price inflation has also
eased and the wholesale price index is currently in a deflationary state.
Hedging
In order to offset currency risk during the plant build-out phase, BioCo should enter into a foreign
currency hedge against the Zloty if building in Poland or the Rupee if in India. The expenditure
required to build a Biotech manufacturing plant is significant, $500M. The plant will also take 4 years
to build. As funding is being raised in USD, BioCo has significant exposure should the dollar devalue
against the host currency over the next 4 years. Indeed, with the US running record trade deficits and
Poland looking to return to lower target inflation levels or India’s high growth rates, a depreciating
dollar is a strong possibility.
As BioCo will likely have to commit to building the plant before payment is made, significant
appreciation in the host currency could require BioCo to require greater USD to convert the host
equivalent. The downside of this risk is that BioCo might not have enough funds to complete the
project should the costs go beyond what had been initially raised. The upside, without hedging, is that
if the host currency depreciates, BioCo could end up in an advantageous position where fewer dollars
are needed to complete the manufacturing plant. As the downside, not completing the project, far
outweighs the upside, gain on currency conversion, BioCo should enter into an options contract or
hedge in order to minimize risk and ensure sufficient funds are available for project completion. The
economic loss that goes to the middlemen in a hedge or options contract, while inefficient in terms of
maximizing expected profits, acts as a kind of insurance ensuring adequate funding for the project. As
BioCo’s expertise is in Biotechnology drugs and not currency trading, the hedge reduces uncertainty
and allows BioCo to focus on their core competencies.
After the plant is complete, BioCo should not hedge revenue from product sales. Hedging product
sales will reduce the overall expected return by incurring costs related to the transaction
intermediary. Indeed as BioCo does not have any particular expertise in foreign currency markets,
hedging may lead to unfavorable situations. One advantage for Poland is its anticipated adoption of
the Euro (2012-2015). After this transition, expenses in Europe will act as a natural hedge against

7. revenue from selling HepCure. This natural hedge will reduce currency exposure if the plant is
established in Poland.
c. Trade Policies:
BioCo’s aim is to infiltrate the European market with HepCure, which will be greatly impacted by the
short run trade policies of the country in which the production facility resides. Protectionism, tariffs,
patent-protection, and even quality control are all important elements to consider in determining
competitive advantages between Poland and India.
Poland
As a member of the European Union, Poland follows the same trade policy as other EU member
states. Its territory is part of the “European Union Customs Area” and, as such, trades with other EU
member states are considered “intra-Community” supplies and purchases rather than imports and
exports. In accordance to the Single European Market principle, all EU-compliant goods manufactured
in a member state may be freely marketed to any other member state. However, some member states
may impose safety standards and other requirements that exceed those of the European Union. Both
the European Union Council and the European Commission set the common trade policies and the EU
Commission alone enforces it. According to the World Trade Organization (WTO), the EU Commission
has an excellent record implementing and enforcing trade policies, including those surrounding anti-
dumping, anti-subsidy, and safeguard proceedings.
To see where EU’s Intra-Community trade policies will go in the future, one must look at the past. A
key ingredient for the successful creation of the EU was the harmonious integration of economic and
political entities from its member states. This was accomplished by constructing a single market in
which a set of common laws applies. These laws guarantee the freedom of movement of people,
goods, services, and capital. There is little indication Intra-Community trade policies will change in the
Short Run for the following reasons. First, history has shown policies related to trade among member
states had been largely unchanged. The basic premise of guaranteeing freedom of movement for
people, services, and goods continue to be the core of the policy. In fact, the changes that did take
place were designed to make Intra-Community trades more efficient and less costly (for example, the
elimination of customs borders between EU members). Second, as the EU continues to grow in
membership, the benefits of becoming a EU member state continues to serve as incentives for
economic reforms for countries trying to fulfill accession requirements. As a measure to maintain
political and economic stability in the region, the benefits of becoming a member state must stay
attractive and largely the same for “would-be” members, discouraging drastic economic policy
changes. Lastly, changing Intra-Community trade policies will not only create economic disruption for

8. existing member states, it will also create political disruption in the region. Political powers from the
various member states have vested interest to keep political and economic relationships strong. To do
this, they must maintain Intra-Community trade policies that are largely the same as they are today.
This projection provides a very favorable outlook for a Poland based facility. Since HepCure’s
destination market is the EU, if BioCo were to set up a manufacturing facility in Poland, a zero-rated
VAT would translate to lower prices for the consumers and higher profits for the firm. BioCo will also
enjoy many Intra-Community trade benefits set out by the EU Commission. This includes the
abolishment of Border Customs, market access to all EU member states (given HepCure passes all
required safety test), and many common trade laws and standards. To ensure BioCo can reap the
maximum amount of benefits from being in a EU state, management is advised that all of the firm’s
business practices, including compensation scale, safety standards, and testing procedures meet or
exceed those from the EU Commission and its target member states. It is also advisable to purchase
supplies and equipment from other EU member states as a cost saving measure to minimize VAT –
given the savings from zero-rated VAT exceeds the difference in price.
India
Up until 1992, Indian trade policy was extremely protectionist, but since then it has
unilaterally lowered tariffs, removed import controls and liberalized some of its service
sectors. Over the 1990-2005 period, India cut its tariffs from an average of about 80% to 17%.
India’s export-to-GDP ratio, now near 20%, has tripled since 1990. In India, the main
legislation concerning foreign trade is the Foreign Trade (Development and Regulation) Act,
1992. The Act provides for the development and regulation of foreign trade. The “Ministry of
Commerce and Industry” has been set up as the most important organ concerned with the
promotion and regulation of foreign trade in India. With economic reforms in the recent
years, globalization of the Indian economy has been the guiding factor in formulating the
trade policies.
Specific to India’s trade policy with the EU, since June 2007 there has been an ongoing
negotiations for a free trade agreement between India and the EU. Currently the EU is
already India’s largest trade partner and with India’s rapidly expanding role in the world
economy, the free trade agreement would make it important for the EU. However the
ongoing negotiations have not shown sign of conclusion and as of the latest status report on
March 2009, it shows that the prospect of the two nations coming to an agreement is still
long in waiting. The EU desires much deeper liberalization than India’s proposals, especially
in sectors such as services, investments and banking. Although the benefits of a FTA for the
two nations are difficult to measure at this time, it would be important for BioCo to pay close
attention to the development of the negotiations.

9. In term of India’s trade policies regarding pharmaceutical products, the most significant
historical policy change affecting the pharmaceutical industry was the 1994 TRIPs (trade-
related intellectual property rights) agreement, by which India finally started to recognize
product patents issued after 1995. The protective legal environment makes India an attractive
site for preclinical research activities and clinical trials, because discoveries made in India can
then be protected by patents globally. More recently in July 2008, the Pharmaceuticals
Export Promotion Council(Pharmexcil), which represents major pharmaceutical companies in
India, proposed the establishment of a registration office in Brussels for pharmaceuticals
companies that want to market their products in Europe. This was supposed to be a step to
strengthen Indian pharmaceutical exports. Unfortunately around the same time Pakistani
government blocked the proposal to import around 400 drugs from India due to quality
issues. Other negative developments for Indian exports around the same timeframe include
the recent spate of accusations of sub-standard manufacturing by the US FDA, leveled against
Indian pharmaceutical facilities.
Overall, although Indian government is considered conservative, when it comes to trade
policies, it is doing what it can to help the exporting sector. The more recent interim policy
announced several additional trade-facilitation measures and procedural simplifications
aimed at reducing transactions costs and delays. We can deem India’s trade policy favorable
for BioCo’s new establishment and it is unlikely for any drastic changes in the near terms.
Nevertheless BioCo needs to ensure its quality standard in compliance to all European
regulations and not just that of India’s and be extremely cautious for any bad PR and quality
issues of other Indian pharmaceutical plants that can potentially impact the entire India
pharmaceutical export.
d. Wages and Labor:
Poland
The average annual salary of a product manager in Poland is $35,000, according to
PayScale.com. Only a few years ago this average was closer to $20,000; however, when
Poland joined the EU in 2004 two occurrences resulted: first, hundreds of thousands of
workers left the country in search of higher paying wages in Germany, England, and Ireland;
and second, hundreds of European companies flooded Poland in search of cheap labor. The
consequence has been a shortage of skilled labor and therefore a dramatic increase in wages
over the last five years.
The recent economic downturn has actually begun to reverse Poland’s labor shortage since
Poland is one of the only European countries with an economy expected to continue to grow
despite the downturn. This has created a reverse exodus of workers. In fact, a recent poll in
Ireland showed a third of that country's estimated 200,000 Polish immigrants plan to leave
Ireland within a year, many to go home. This has resulted in a about a 1% decrease in overall
wages for both January and February of 2009, according to data released by the Central
Statistical Office of Poland. However, the same data suggests that corporate wages have
remained steady and are expected to reach 5% growth in March. This finding suggests that

10. unskilled labor wages will maintain or even decrease, but that there is still a shortage and
demand of skilled labor.
Unemployment in Poland edged up to 10.9 percent in February, according to labor ministry
data, up from around 9 percent in 2008 but still only about half the level seen as recently as
2004.
Poland clearly has a history of drastic fluctuations and recent increases in wages. The upside
is that the poor economy in the rest of Europe along with the subsequent influx of labor
suggests that wages for unskilled labor will not increase –and may even decrease - for the
next several years. The downside, however, is that the cost of skilled labor, such as chemists,
attorneys, and managers, will continue to rise at an estimated 5% per year and that Poland’s
healthy economy in a poor world economy will cause a greater demand for such labor.
India
The average annual salary of a product manager in India is $16,000, according to
PayScale.com. Additionally, India is expected to see the highest salary increases among
nations in the Asia-Pacific region, of around 10.8 percent this year, due to the huge demand
for talent in the country, despite the global economic crisis severely impacting overall wage
increments in the region. This wage increase is expected to continue at a similar rate for the
next five years.
Much of the increase is due to what many economists consider to be a saturation of
companies in India. The attractive low wages, infinite unskilled labor force, and growing
skilled labor force has caused thousands of companies to establish production or service
facilities in the country and has therefore created a demand for such labor.
The upside to establishing a plant in India is that average wages are still low on the world
scale (and nearly half as much as Poland) and will continue to be relatively low over the next
several years. The downside is that wages are continuing to grow at a rapid pace and may
even escalate at a higher rate due to increased labor demand. Also, recruitment could
become a major obstacle doe to the saturation of companies.
e. Political Forces:
The political environment in India as well as Poland will have a huge impact on business
advantages in the country. Specifically, the government’s policies towards unions, corruption,
and stability are the main driving forces of competitive advantage. Many decisions taken by
the present as well as future governments could have material impact on Bio-Co’s investment
in these 2 countries. Hence, understanding the political forces within India and Poland in the
short run is important to our decision-making.
Poland

11. Poland’s current government is a coalition between the centre-right Civic Platform (PO) and
the small Polish Peasants' Party (PSL). Together, they command a safe parliamentary majority,
and as such offers good prospects for political stability, at least in the short term.
Upside:
The PO-PSL government has adopted a more liberal approach to economic policy than
previous administrations. They have also shown interest in trying to rebuild relations with
Germany, which deteriorated sharply under the previous administration. Improved relations
will likely be more beneficial to Poland and its markets. The crisis in Georgia in 2008 as well as
the recent gas dispute between Russia and Ukraine is also likely to lead to an even closer
security relationship with the US, which may mean more political stability within the country,
and clout in the region.
Downside:
Tensions between the PO and the more statist PSL are starting to appear, and growing, and
the coalition may not survive to the end of the parliamentary term in 2011. Allegations of
nepotism and unethical behavior have created rifts within the government at a time of
growing tension between the two coalition partners. Recently, the PSL has been demanding
special treatment for its supporters, which is one reason for the strain between the two.
While controlled for now, they are nevertheless likely to increase over time.
The current government is considered soft on corruption, and give-and-take is expected to
get things done. This can mean additional bureaucratic hurdles within the govt. structures as
we seek the necessary permits to setup the Bio-Co plant. In addition, the coalition is not able
to overturn any presidential vetoes without the support of the centre-left opposition parties.
This limits its ability to make radical changes in economic policy.
Finally, Poland’s alignment with US interests however will likely lead to tensions with Russia.
This may impact Bio-Co’s distribution capabilities within Russia if it arm-twists Poland with
restrictive trade policies.
Overall Impact:
Poland’s government is probably the least feeble in Eastern Europe. It does not have to cope
with either a collapsing property bubble or a highly leveraged financial system. Neither the PO
nor the PSL appear to have any wish to see the coalition break up. However, given their
competing agendas, the coalition is on shaky grounds. Tensions between the PO and the
more statist PSL are likely to rise over the short run period, and the coalition may not survive
to the end of the parliamentary term in 2011. We are unable to forecast what impact the next
government (if this one falls) will have, and the policies they will lean towards. However, we
do expect that the liberalization policy that has benefited Poland will continue under this and
the next administration, the chief driver being Poland’s need to integrate within the EU.
India

12. India is electing a new government as this report is being written. Elections are being held for
the Indian parliament in a five phase election starting on the April 16th with the last phase
ending on May 13th 2009. The results of the election are expected to be announced on May
16th, 2009.
In the recent years India has moved towards politics of coalitions with no party able to gain
absolute majority and parties horse-trading and cobbling together a government dependent
on many parties, each tugging the government in a different direction.
Upside:
If the UPA government headed by the Congress party or the NDA coalition headed by the BJP
party is able to win an absolute majority we can expect rapid movement on the liberalization
front which will reduce protectionism and provide conditions more favorable to foreign
investment.
Downside:
If neither UPA nor the NDA is able to gain an absolute majority, both parties are expected to
make concessions to either the Communist parties or the Regional parties. The Communist
parties are expected to stress on labor rights and unions while the Regional parties are
expected to make the government look inward and promote protectionism and oppose rapid
change. If the communist parties do retain some power then they may reduce some of the
tax benefits for Bio-tech industry and SEZ's which may materially impact the attractiveness of
India as a destination.
Overall Impact:
The results of the election are difficult to predict; however, the outcome will greatly
determine the competitive advantages in India’s political environment. Concessions made to
the Communist and Regional parties could have substantial detrimental impacts by creating
stricter labor regulations and a pro-union bias.

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