Impact of Innovation on the Performance of Indian Pharmaceutical Industry Using Data Envelopment Analysis

In this paper we have used data envelopment analysis (DEA) and econometric models to analyse the impact of research and development and innovation on relative efficiency and productivity change and firm performance in Indian pharmaceutical industry (IPI) between 1998 and 2007 which covers the post-TRIPS (1995) and post Indian Patent Act Amendment (2005) period. Output oriented BCC DEA model and Malmquist productivity index are used to estimate the relative efficiency and productivity change of Indian pharmaceutical companies over the 10 year period. Using econometric models, we have proposed and tested several hypotheses for the IPI and found a positive impact of innovation represented by R&D investment and patents on productivity (sales), market share, exports and ability to attract contract manufacturing among Indian pharmaceutical companies. We also found that the sales growth is additionally driven by DEA efficiency, size, age which have a positive impact on productivity (sales). Export revenue is additionally driven by sales. Within the limitations of the model discussed, contract manufacturing was additionally driven by innovation, size and sales. The company sales growth was additionally driven by export growth and DEA efficiency. The DEA efficiency having a positive impact on sales and sales growth is a new finding as there appears to be no previous investigation to explore this relationship