Is productivity of Indian pharmaceutical industry affected with the introduction of product patent act?
Authors: Mahajan Varun 
Published: February 2020

Purpose

The purpose of this paper is to empirically study the impact of product patent regime on the productivity of different categories such as ownership, R&D, size and product-wise of Indian pharmaceutical firms using non-parametric data envelopment analysis.

Design/methodology/approach

The present study has applied Ray and Desli’s Malmquist productivity index and its decomposition to measure total factor productivity (TFP) change, pure technical efficiency change, scale efficiency change and technical change under variable returns to scale (VRS) technology assumption for 141 Indian pharmaceutical firms during 2000-2001 to 2014-2015.

Findings

The study found the negligible impact of product patent regime on productivity. The technological change has played a positive role in the growth of productivity, whereas technical efficiency change depicts the judicious utilization of resources for improving performance. From the results, it is found that R&D intensive firms depict better stability in the TFP than the non-R&D firms. However, Granger causality between R&D and productivity found no relationship. Productivity is more directly affected by investment in fixed assets rather than in R&D, which focusses on incremental value additions in a largely branded/plain generic product market. In case of ownership, private foreign firms found to have registered progress in TFP while others have recorded marginal regress, which probably could be attributed to the superior marketing and management skills of the foreign firms, besides possessing proprietary technology. Both small and large firms have shown positive growth in the new regime as compared to the pre-patent regime. These small firms are able to compete with large firms because of their up-gradation of the technological base by improving access to better foreign technology. TFP growth for all the firms can be attributed to improvement in technology, and innovation in terms of high capital-output ratio. Further, the paper tried to identify the determinants of productivity from panel random effect regression, and it is found that export intensity, age and the new patent regime have negative and significant relationship with productivity, whereas other variables such as R&D, ownership, size and capital imports are insignificant. In the end, the results of sensitivity analysis have confirmed the validity of the selected variables.

Practical implications

The results suggest that Indian pharmaceutical firms need substantive improvement in TFP by improving managerial and scale efficiency. Indian pharmaceutical industry (IPI) needs to improve productivity across the network and drive cost excellence initiatives across the spend base through operational excellence and digital initiatives. The results of this paper can be applied in framing policies for future growth and improvement in the productivity of IPI.

Originality/value

The paper aims to make several new contributions to the existing literature. Most of the research papers only analysed TFP of the industry as a whole and detailed firm-wise analysis is needed to capture the true impact at a unit level. This study has analysed the impact of different categories such as ownership, R&D, size and product-wise, and determinants of productivity. The study has used a broader time period and larger panel data to predict the better picture.