R&D and firm performance: evidence from the Indian pharmaceutical industry

This paper examines the impact of research and development (R&D) activities on firms' performance for the Indian pharmaceutical industry by utilizing the data of the postreform period (1994-2006). For this purpose, we construct two empirical frameworks, namely growth accounting and production function. Estimation results based on the growth-accounting framework suggest that R&D intensity has a positive and significant effect (15%) on total factor productivity. The results also confirm that the performance of foreign firms operating in the industry is more sensitive toward R&D than the local firms. Furthermore, the estimation results of the production function approach indicate that the output elasticity to R&D capital varies from 10% to 13%. In view of these findings, we propose further encouragement and incentives for doing in-house innovative activities in the Indian pharmaceutical industry.