Efficiency and productivity of Indian pharmaceutical industries since the reforms: Malmquist-Meta-Frontier approach

The object of this research project is to examine how best the Indian Drugs and the Pharmaceutical firms are performing in the post reform era. The importance of analyzing the ‘performance’ of the Indian pharmaceutical firms arises because the industry has evolved around the process patent regime of 1970 by‘re-engineering’ the ‘patented-product’ of the foreign companies. However, the recognition of product patent in the amended patent act of 2005 and the changes in the domestic regulation in 1991 has opened up new challenges for the Indian Pharmaceutical firms. It is expected that all firms may not benefit equally from a competitive environment in a knowledge-intensive sector like pharmaceuticals, where firms differ with respect to their access to technology and state-of-knowledge. The present study therefore examined who are the gainer and the loser due to the policy changes and what implication it has on the structure of the industry. Using firm level panel data that spans from 1991 to 2005, the performance of the firms has been evaluated by examining their efficiency, productivity and profitability. An in-depth analysis of the efficiency and the productivity of the firms have been done using the advanced technique of Malmquist Productivity Index and Meta-Frontier Approach to efficiency analysis. The profitability of the firms has been examined using the dynamic panel data models.

Results from the analysis shows that the policy changes have generated new production possibilities and there is an outward shift in the production frontier of the sector. However, it is interesting to note that on an average; only a few firms have been able to access the benefit of technical change. Consequently, the efficiency of the pharmaceutical firms has deteriorated whenever there is technological progress. We also notice that due to policy changes the profitability of the firms has also declined. Thus, we can conclude by stating that while the market reforms has indeed opened up new production opportunities due to the entry of new firms in the market with better technologies or due to access to better technology, a large section of small and medium sized firms have failed to appropriate the growing market opportunities. Consequently, on an average the performance of the firms has deteriorated due to market reform. A look into the determinants of the efficiency of the firms reveals that small firms can gain efficiency if they grow in size. However, large-sized firms cannot gain efficiency if they simply merge in size. Significant gain in the efficiency is, however, possible if firms integrate vertically with the down-stream firms that produce the raw material or bulk drugs. It is also interesting to note that the recent R&D initiatives of the firms can be useful to achieve higher efficiency only when it is targeted for high value products and done in large scale. However, few firms have the financial capacity to undertake R&D in large scale. Thus, the study underlies the importance of public-private partnership to boost up the R&D ambience of the country. Results from the profitability analysis indicate that by spending more on marketing the profitability of the firm falls. Instead, a firm should spend more on R&D to come out with new product and then market its product.

Paper Presented in National and International Seminars:

‘Globalization and Indian Industries : A Case of Pharma sector’ paper presented in the Symposium ‘The Challenges of Globalisation: Australian and Indian Perspectives’ on 27 and 28th April 2010 New Delhi organized by the University of Melbourne, in partnership with the University of Delhi.

“Examining the Efficiency and Productivity Changes of the Indian Pharmaceutical Firms: A Malmquist –Meta Frontier Approach” paper presented in the 6th North American Productivity Workshop June 2-5 2010 organised in the RICE university Houston USA.

“The Sources of Heterogeneity in the Efficiency of Indian Pharmaceutical Firms” paper presented in the 6th North American Productivity Workshop June 2-5 2010 organised in the RICE university Houston USA.

Publication in 2010 from the Project:
(1)”Comparing the Efficiency of the Indian Pharmaceutical Firms: A Meta-Frontier Approach” The Indian Economic Journal Vol 57, Number 4 pp 60-83 by Mainak Mazumdar and Meenakshi Rajeev.

Papers under Revision :
(2)‘Do Higher Spending in Marketing Enables Firms to Earn Higher Profits: the case of Indian Pharmaceutical Industry’ under revision in the ‘International Journal for Industrial Organisation, Elsevier Publication ’

(3) ‘A Group-Wise Comparison of the Efficiency of Indian Pharmaceutical Firms’ under revision in the ‘Bulletin of Economic Research, Blackwell Publication’

(4) ‘Product Patent, Emerging Strategies and Productivity & Efficiency of the firms: A Malmquist-Meta-Frontier Approach’ under revision in the Empirical Economics Springer Publication’.

  • Participants :
    Meenakshi RAJEEV
    Subhash C. RAY