Abstract
In this chapter we have classified firms according to their strategies and structures and compared the efficiency at two different levels viz., the global and local frontiers. The global frontier is constructed by taking into consideration all the firms in the sample and the local frontier by considering only the firms from the group. A cross comparison of the efficiency at two different levels enable us to examine whether the inefficiency arises due to firm specific intrinsic factors or due to its strategies or structure. The analysis reveals that firms undertaking R&D are gradually catching up with the global frontier. We also notice that firms producing only finished products or formulation are by themselves efficient; however, by integrating with the downstream raw-material industry additional efficiency gain is also possible. Similarly for firms selling their product only in the domestic market an additional efficiency gain is possible by changing their strategy and selling their product in the international market.
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Notes
- 1.
A unit value of PPR implies that group and the global frontier coincide, whereas a fall in the value of PPR implies a rise in the distance between the local and the global frontiers.
- 2.
The classification is based on discussion with some pharmaceutical companies.
- 3.
In the previous chapter, we have noticed that, on an average, pharmaceutical firms are more efficient in utilizing their inputs. The differences in the efficiency of firms, however, arise mainly for the output case. Thus, it will be more appropriate to compare the efficiency of firms on the output front.
- 4.
In the previous chapter we have noticed that, on an average, pharmaceutical firms are more efficient is utilizing their inputs. The differences in the efficiency of the firms however arise mainly for the output case. Thus, it will be more appropriate to compare the efficiency of the firms on the output front.
- 5.
The non-radial approach, however, cannot be used here because it does not consider an equi-proportionate expansion in output or a contraction in input. Therefore, the projection of the efficient bundle of a firm can take place at different points on the local and the global frontiers. However, in a radial approach, the projected output bundle of a firm on a local -frontier is scaled up further along the same radial axis on the global frontier.
- 6.
If however, \( {\lambda_{{ki}}} \geq 0 \) we have the standard Charnes Cooper and Rhodes (CCR) model that assumes the underlying production technology to exhibit Constant Returns to Scale (CRS) technology.
- 7.
The distance between the local and the global frontier is defined by Battese et al as the Technology Gap Ratio and by Bhandari and Ray (2007) as the Technological Closeness Ratio (TCR). It can also be synonymously called the production possibility ratio (PPR) that captures the differences in the production opportunities among firms.
- 8.
The figure has been arrived at by computing the geometric mean of the efficiency scores of the firms from 1991 to 2005.
- 9.
Almost 50% of the firms in this sector are engaged in R&D related activities, see Chap. 1.
- 10.
This issue has been investigated further in the next chapter where we have also computed the technical change of firms along with the efficiency change. Our analysis indeed brings out the fact that by undertaking R&D, few frontier firms have experienced technical change or an outward shift in the production frontier Such outward shift in the frontier has also reduced the efficiency of the rest of the firms in the sample.
- 11.
On an average, the PPR for firms with R&D related outlays is.84 and for firms with R&D is.91. The percentage differences is then about 8%.
- 12.
A Krusal –Wallis χ2 test has been conducted to examine the mean differences in efficiency level across size firms with R&D related outlays. The size of the firms is measured in terms of sales volume. The differences in the mean efficiency scores are significant at 1% level across the size for firms with R&D related outlays (see Table A.1, Appendix A).
- 13.
CMIE database do not provide company reports consistently for all the years. It is available only from 2000 onwards. Though such information cannot be utilized for a rigorous econometric analysis it is useful to gather insights for certain features of the pharmaceutical firms and understand about their performance differences.
- 14.
This has been crosschecked and substantiated from the information provided by the companies in their respective websites. Almost all the registered companies maintain their websites and provide information about the agenda.
- 15.
From our field survey, we have also come to know that it is easier for small firms to enter into collaboration with MNCs if they have niche products under their command. Thus, for example, if a firm can build its expertise in novel drugs delivery system, MNCs might find it attractive to enter into collaboration with these firms. In turn, by undertaking process R&D for the global majors, these small firms also gain proficiency and expertise in production. The MNCs are also keen to outsource their process related activities because it is time consuming and laborious in nature. While such activities provide the much-needed benefit to the global majors, it is also a huge opportunity for smaller firms, making it a win-win strategy.
- 16.
Estimated against the local and the global frontier, we notice that, on an average, the efficiency scores of small firms with R&D related outlays are about.32 and.28 respectively. The corresponding figures for firms without R&D related outlays are about.42 and.34.
- 17.
Generally, firms from this group upgraded their production base to capture the outsourcing markets from MNCs in the form of contract manufacturing. MNCs are also keen to outsource their manufacturing activities to cut down their cost of production and allocate more resources in their R&D related activities (see Chaudhuri 2005). From our previous chapter we notice that firms can gain on the efficiency count by installing imported plant and machinery.
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Mazumdar, M. (2013). Comparing Efficiency Across Various Groups of Firms: A Meta-Frontier Approach. In: Performance of Pharmaceutical Companies in India. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2876-4_4
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