Determinants of operational efficiencies in the Indian pharmaceutical industry

Abstract

Operational efficiencies of a firm play a crucial role in determining the survival and growth of a firm, especially when the industry is going through a dynamic structural transformation owing to external changes. In this paper, we explore the effect of managerial and strategic parameters on the degree of operational efficiency achieved by a firm in the Indian pharmaceutical industry using data envelopment analysis (DEA). During the period 1992-2002, the relaxation of import restrictions and foreign direct investment, along with a major change in the regulatory norms, resulted in increased competition from firms with superior resources in this industry. We use non-parametric DEA models and parametric methods such as regression analysis to determine the factors that have contributed to the internal operational efficiencies of these firms. The findings indicate that domestic firms, most of which are controlled by family-based governance structures, enjoy higher efficiencies than affiliates of multinational pharmaceutical majors. After controlling for firm size and initial efficiency levels, we find that firms with higher levels of innovation through higher R&D investments and older establishments are associated with higher efficiencies, when compared with their less R&D intensive and younger counterparts, respectively.