Leadership and Democracy LabWestern Social Science

Corruption in China

Main Contributors: Aleeshia Carman and Mahathi Mundluru

Team Leader: Marissa Vaillant

In 2012, Xi Jinping of the Communist Party of China carried out the country’s largest organized anti-corruption campaign in history. Despite these efforts, corruption has remained a pervasive issue within Chinese business with an estimated 35% of all Chinese firms having to pay bribes in order to maintain operations and keep up with competition. In China, bribery is considered to be the unspoken rule of the industry in order for firms to obtain greater access to supplies and raw materials necessary to run their business. These bribes are generally given to government officials - including tax collectors, federal government officials, customs officers, and road police. While several firms acknowledge that bribery and corruption are serious issues plaguing the business area, the majority have lost hope that reform of any kind will occur.

The pharmaceutical industry is a particularly delicate area of business because it affects the lives of so many individuals. Allegations of corruption can have a severe negative impact on the consumer’s perception of a company which would not only result in the loss of market share, but also impose significant litigation costs, fines, and penalties. While the healthcare system is largely dominated by the public sector, the majority of the pharmaceutical companies are private multinational corporations (MNCs); thus, allowing for an environment that is incredibly susceptible to corruption.

The most prevalent type of corruption is bribery. Companies offer large sums of money to key leaders during clinical trials and product licensing as a measure to ensure that their drugs obtain the appropriate approval, despite any flaws. Furthermore, companies offer inappropriate benefits, excessive gifts, and payments through high profit margins in order to influence healthcare practitioners to prescribe the company’s drugs.

It is also common to find falsified documents to promote a particular drug, or appear as a far more successful company on record. For instance, pharmaceutical companies have been known to create fictitious expense claims and marketing schemes with fabricated statistics in order to generate slush funds. Furthermore, companies collude with vendors and travel agents in order to provide healthcare practitioners with inappropriate side trips and sponsorship during overseas conferences. MNCs also offer a large number of free goods and samples to distributors who then sell these products on the black market to generate funds, which are then used to bribe doctors and hospitals.  Finally, financial statements and records are often misrepresented in order to make the company seem more successful.

One particularly daunting challenge that has arisen within the Chinese pharmaceutical system is the lack of tracking. With the rise of pharmaceutical reform in 2009: “Opinions on Deepening Pharmaceutical and Health System Reform”, the pharmaceutical system has faced challenges of decentralization. It has become increasingly difficult for government based companies, such as the  National Development and Reform Committee (NDRC), and the China’s Drug and Food Administration (CDFA) to regulate companies. Since the decentralization of the pharmaceutical market, there has been an increased need for local companies to support the 700 to 800 million people that live in rural areas. Along with the creation of local companies, there has also been an increase in the number of MNCs, specifically in Hong Kong. The creation of the local and international sector is attributed to the declining poor economy. At the start of 2015 there was a growth rate of 15.1 percent in the first quarter, but the second quarter ended with 4.6 percent. The local and international sectors are important for the patients to receive timely, and effective pharmaceuticals, but has created a drawback in terms of safety and regulation. There have been many cases of poor distribution since the 1990’s with China’s market.

A recent study from 2011 found that the distribution of illegal vaccines have affected approximately 24 provinces. The distribution through local companies was not properly regulated by the NDRC and CDFA; the vaccines were not properly refrigerated, were not licenced, and were not distributed in approved conditions. This contributed to the damaging branding around China’s local pharmaceutical market, where more consumers are self-diagnosing and self-medicating or buying pharmaceuticals from international companies. Hong Kong is an example of the growth within the international pharmaceutical sector, and the rise of online purchasing. Consumers and patients are purchasing cheaper products from high traffic areas, such as Hong Kong, instead of buying from companies within China. The CDFA, since 2014, has yet to clinically approve over 18,000 pharmaceuticals, which in turn are being developed elsewhere and causing poor distribution of drugs created by national companies. 

As foreign pharmaceutical companies consider expanding to China, it is important that they realize the extent of corruption and illegal dealings in the industry and country in general. Despite the commonness of such activity, it is imperative that foreign companies maintain legal operations that abide by all local and international laws and regulations. Corruption is a risk of doing business, but mitigating that risk should not involve engaging in corruption.