This paper investigates the effects yielded by the interaction between government regulation policies and parallel trade, with a particular focus on the pharmaceutical sector. We provide a complete welfare analysis that accounts for both global investment decisions in R&D as well as local costly distribution of drugs. We study the patent holder’s decisions when a foreign government can introduce a direct price control to lower the price of patented drugs. We show that, under parallel trade, investment can rise only when the foreign government takes into full account its impact both on investment and on the firm’s decision to supply the regulated country. This arises because of a complete withdrawal from price regulation. The regulated country is however better off under an intermediate form of commitment whereby the foreign government anticipates its effect only on local distribution and delivery, but not on global R&D investment. In this case, the government resorts to some price regulation, which reduces investment in particular under parallel trade
