Although governments often engage in pharmaceutical production in order to develop a local industry, local production is obviously quite distinct from public production. As many countries have moved away from import substitution policies the arguments for local production have been weakened. The WTO may also make the case for local industry less strong. Yet there are still reasons why local production may be desirable, particularly in terms of developing local capacity, creating jobs and achieving some independence from international suppliers.
The viability of local pharmaceutical production will be influenced primarily by the size of the market (population and income levels), the existence of other production capacity in the region, the size and local procurement preferences of the public sector market, physical infrastructure (cost and reliability of water, power and other resources), and human resources (pharmacists, chemists and other technical specialists and skilled production staff).
Government policy may also have an important impact on the viability of local production. Table 13 outlines some of the regulatory and legal provisions, investment and industrial development factors, economic incentives and disincentives, and import controls which may directly or indirectly influence local production.
Government policies as a whole may actively support or be neutral towards local pharmaceutical production. An intentional policy of discouraging local production is uncommon, though it is not uncommon for policies and regulations unintentionally to discourage local production. For example, the combination of high import duties on packaging material and low duties on finished pharmaceutical products may make locally produced drugs more expensive than imported finished products. Certain policies may encourage all production, while other policies may provide differential preference for indigenous or essential drugs.
Many national procurement procedures, as well as standard procurement procedures for financial institutions such as the World Bank, provide for local preference in public tendering. Typically the local supplier is given preference as long as the bid price is within 10-15% of the overseas price (adjusting for currency differences and including insurance and freight). Since Ministry of Health drug procurement is usually limited to essential drugs, this means that local manufacturers are encouraged both by volume and by a price advantage to concentrate production on essential drugs.
To further support local production of essential drugs, some governments lower or remove duties on raw materials for these drugs. In addition, ministries of health in Colombia, Ecuador, Nepal, Venezuela and a number of other countries have helped to arrange training in good manufacturing practices for local private producers. This is of direct benefit in terms of the quality of drugs on the local market. It also contributes to the firms' competitiveness in the regional and global pharmaceutical markets.
Policy-makers should be aware of the range of possible production options. Distinctions are commonly made between:
• primary production (manufacture of the raw materials used in pharmaceutical production);
• secondary production (processing of finished dosage forms from raw materials or intermediate products);
• tertiary production (packaging and labelling of finished products from primary and secondary sources).
Table 13. Factors influencing viability of local pharmaceutical production
Regulatory and legal provisions
• Ease of registration, registration preference
• Patent protection of products and processes
• GMP standards and enforcement of standards
• Generic labelling, prescribing and dispensing laws and practices
Investment and industrial development environment
• Tax or other investment incentives
• Industrial development funds (access to start-up capital)
• Ownership requirements (limits on foreign ownerships, requirements on local ownership)
• Repatriation of profits (foreign investors)
Economic incentives and disincentives
• Price controls
• Access to foreign exchange
• Export incentives
Duties and import controls
• Active pharmaceutical ingredients (versus finished products)
• Inactive pharmaceutical ingredients and other raw materials
• Packaging materials
• Specialized pharmaceutical equipment
• Non-specialized equipment
Source: Adapted from 
The capacity for tertiary production is often developed first by countries and can help build the requisite skills and experience for other levels of production. The local manufacture of liquid preparations (intravenous solutions, oral liquids) is likely to be more economically viable than other preparations due to the high transportation costs of these substances.
Local production capacity may also be enhanced by encouraging the development of joint ventures and licensing agreements between local and multinational firms. This has occurred in many East and South-East Asian countries . Local subsidiaries and joint ventures can result in transfer of technology and technical skills. On the other hand, governments may be concerned that multinational profits do not remain in the country and therefore place controls on such ventures. In India and several other developing countries there are controls on the share of the domestic market which foreign-owned firms can take.