The Director of the Asia Health Policy Program, Karen Eggleston, served as guest editor of the International Journal of Healthcare Finance and Economics for the June 2009 issue. The eight papers of that issue evaluate different provider payment methods in comparative international perspective, with authors from Hungary, China, Thailand, the US, Switzerland, and Canada. These contributions illustrate how the array of incentives facing providers shapes their interpersonal, clinical, administrative, and investment decisions in ways that profoundly impact the performance of health care systems.

The collection leads off with a study by János Kornai, one of the most prominent scholars of socialism and post-socialist transition, and the originator of the concept of the soft budget constraint. Kornai’s paper examines the political economy of why soft budget constraints appear to be especially prevalent among health care providers, compared to other sectors of the economy.

Two other papers in the issue take up the challenge of empirically identifying the extent of soft budget constraints among hospitals and their impact on safety net services, quality of care, and efficiency, in the United States (Shen and Eggleston) and – even more preliminarily – in China (Eggleston and colleagues, AHPP working paper #8).

The impact of adopting National Health Insurance (NHI) and policies separating prescribing from dispensing are the subject of Kang-Hung Chang’s article entitled “The healer or the druggist: Effects of two health care policies in Taiwan on elderly patients’ choice between physician and pharmacist services” (AHPP working paper #5).

In “Does your health care depend on how your insurer pays providers? Variation in utilization and outcomes in Thailand” (AHPP working paper #4), Sanita Hirunrassamee of Chulalongkorn University and Sauwakon Ratanawijitrasin of Mahidol University study the impact of multiple provider payment methods in Thailand, providing striking evidence consistent with standard predictions of how payment incentives shape provider behavior. For example, patients whose insurers paid on a capitated or case basis (the 30 Baht and social security schemes) were less likely to receive new drugs than those for whom the insurer paid on a fee-for-service basis (civil servants). Patients with lung cancer were less likely to receive an MRI or a CT scan if payment involved supply-side cost sharing, compared to otherwise similar patients under fee-for-service. (This article is open access.)

The fourth paper in this special issue is entitled “Allocation of control rights and cooperation efficiency in public-private partnerships: Theory and evidence from the Chinese pharmaceutical industry” (AHPP working paper #6). Zhe Zhang and her colleagues use a survey of 140 pharmaceutical firms in China to explore the relationships between firms’ control rights within public-private partnerships and the firms’ investments.

Hai Fang, Hong Liu, and John A. Rizzo delve into another question of health service delivery design and accompanying supply-side incentives: requiring primary physician gatekeepers to monitor patient access to specialty care (AHPP working paper #2).

Direct comparisons of payment incentives in two or more countries are rare. In “An economic analysis of payment for health care services: The United States and Switzerland compared,” Peter Zweifel and Ming Tai-Seale compare the nationwide uniform fee schedule for ambulatory medical services in Switzerland with the resource-based relative value scale in the United States.

Several of the papers featured in this special issue were presented at the conference “Provider Payment Incentives in the Asia-Pacific” convened November 7-8, 2008 at the China Center for Economic Research (CCER) at Peking University in Beijing. That conference was sponsored by the Asia Health Policy Program of the Shorenstein Asia-Pacific Research Center at Stanford University and CCER, with organizing team members from Stanford University, Peking University, and Seoul National University.

As Eggleston notes in the guest editorial to the special issue, AHPP and the other scholars associated with the issue “hope that these papers will contribute to more intellectual effort on how provider payment reforms, carefully designed and rigorously evaluated, can improve ‘value for money’ in health care.”

Venture capital (VC) investment provides a unique mechanism for gauging the technological and entrepreneurial sophistication of a national economy. It is no surprise, then, that the two giants of Asia—China and India—have rapidly become important destinations for VC investment. The latest data available from Ernst & Young reveals an astonishing development: China received more VC investment than any nation except the United States. India, though lagging behind China, still received $862 million. To compare, over $30 billion in VC money was invested in the United States in 2007; $823 million was invested in Canada. Clearly, China and India are becoming nodes for the global VC practice. Many of the largest and most prestigious Silicon Valley VC firms have established significant presences in both nations.

China and India differ in many ways, but with respect to the development of VC they share important characteristics. Until late 2008, both nations had rapidly growing consumer economies. The Chinese and Indian governments and populations both agree that education—and particularly engineering—is critical to their future. Both China and India are leaders in sending their graduate students abroad, which has created a pool of well-trained nationals overseas who can advise their peers at home, or even return home themselves to set up new ventures. Many of these Chinese and Indian nationals have worked in U.S. sciences and engineering-based firms. Such professional experience, especially during the last two decades, has laid the basis for successful technology-based entrepreneurship, and the growth in VC that accompanies it.

When VC investing is viewed globally, U.S. dominance is unquestioned. In the United States, 30–35 percent of all VC-financed firms are located in the San Francisco Bay area. Another 10–12 percent are located in the Boston and New York areas, respectively. In India and China, VC investments are similarly concentrated, and generally occur in locations with the greatest concentrations of highly educated persons. As Table 1 indicates, the investment concentration is remarkable. Forty percent of all the VC-funded firms are located in Beijing, 26 percent are in Shanghai, and the Southern Chinese triangle of Shenzhen, Guangzhou, and Hong Kong accounts for another 14 percent. VC investment in China is even more concentrated than in the United States.

Table 1 VC Investments in China and India by City, 2004–2007
(more than 5 investments per city)

Chinese City    Number of Firms    Percent    Indian City    Number of Firms    Percent
Beijing                   213                  40          Bangalore           55                    38
Shanghai               137                  26          Mumbai              31                    21
Shenzhen                36                    7          Chennai             21                     14
Hong Kong              19                    4          New Delhi           16                    11
Guangzhou             16                    3           Hyderabad          11                     8
Hangzhou               13                    2           Pune                   8                      5
Nanjing                  11                    2             n/a       
Suzhou                    9                    2             n/a       
Wuhan                     7                    1             n/a       
Others                   66                   13           Others                4                      3
Unknown                  1                    0          Unknown             0                       0
Total                      528               100            Total                146                  100
Binational                9                    2          Binational             45                    31


VC-backed startups in India, though more diffuse in terms of the top six, are more concentrated overall. Three city regions—Bangalore (38 percent), Mumbai (21 percent), and Chennai (14 percent)—attract the largest investment. However, when including Delhi (11 percent), Hyderabad (8 percent), and Pune (5 percent), these six cities account for an even greater percentage of overall VC investment. The most technology-oriented cities in both nations, Beijing and Bangalore, have received approximately 40 percent of all VC investment. The second largest recipients are Shanghai and Mumbai, which are also the financial capitals.

In China, an enormous economy growing at nearly 10 percent per year even as it emerges from a socialist past, there are significant opportunities in infrastructure development and in supplying the burgeoning underserved consumer market. In a recent Ernst & Young report, Fan Zhang, one of the founding managing partners of Sequoia Capital China, was quoted as saying that “one of the factors that attracted Sequoia Capital to China is the country’s booming consumer market that provides an opportunity to create companies to define certain sectors and fill the need for strong brands, not only in technology but also tech-related consumer services and more traditional industries.”

Zhang is correct—VC investing in China does not directly compete with U.S. firms seeking VC investment. Table 2 shows the fields that VC firms are targeting in China. The table is divided into two binary categories—whether the firm receiving the investment targets the domestic or the global market across a variety of industries, and whether a given firm is in a high technology or non-high technology sector. Chinese firms, even those in technology-based fields, overwhelmingly target the domestic market (87 percent). The Internet has given rise to the largest number of VC startups, nearly all of which are focused on the Sinophone market. Two other key areas—software (10 percent) and mobile phone applications (10 percent)—also cater almost exclusively to the Chinese market. This domestic focus suggests that it will be quite some time before VC-backed Chinese firms threaten counterpart firms in the United States. A possible exception may be semiconductor design, where there are some Chinese startups. Though few Chinese VC-financed firms are likely to be directly competitive with U.S. firms in global markets, many of these Chinese firms compete ferociously against U.S. multinationals trying to make their own inroads into the Chinese domestic market.

Table 2 VC Investments in China and India by Sector and Market, 2004–2007

                                         India                               China
Sector                      Domestic*    Global         Domestic **    Global

Semiconductors               0               7                  22                20
Internet                        16               3                144                  2
Software                         2             14                  55                  4
Communications              1               4                  23                  9
Services                          4             53                  28                  9
Mobile phone                   7              5                   51                  1
Media                             2              0                    35                 0
Healthcare                      1               4                   26                 4
Retail                             1               1                   19                  0
Miscellaneous                  2               0                  20                  2
Components                    0               0                   2                   1
Energy                            0               0                   6                   8
Environment                    0               0                   5                   1
Manufacturing                  0               0                 25                  6
Total                              34             91                461                67

* Domestic firms are identified as those that made no apparent attempt to serve overseas markets.

The profile of Indian firms differs from those in China. First, Indian firms are internationally oriented (73 percent); only 27 percent focus on the domestic market. With respect to sector concentration, VC investing in India favors the services sector (46 percent) and software (13 percent). This is not surprising, given India’s well-known comparative advantage in these arenas. Unlike most VC-backed companies in China, many Indian firms may well create competition for U.S. service firms, despite the less developed nature of the Indian economy as a whole.

China and India continue to attract significant VC investment, albeit in different sectors. Today, China is second only to the United States in terms of VC investing, and this is unlikely to change. In China, the preponderance of VC investment is geared to the rapidly growing internal market. The size and unique nature of this market offers entrepreneurs lucrative opportunities to provide “knock-off” U.S. Internet sites for the Chinese market. There are Chinese interpretations of Yahoo!, Google, eBay, Facebook, and Monster.com that service Chinese customers. These firms are self-limited by the language; as such, they do not threaten companies overseas. Moreover, these Chinese companies do not own unique or global class technology that could challenge larger multinational players. It is unclear whether this situation will change over time.

Indian firms differ from Chinese firms in their strong outward orientation. In percentage terms, more Indian than Chinese firms operate in hard-core technology fields. Thus, while China currently enjoys greater VC investment, it is possible that Indian firms may ultimately play a bigger role in the global economy.