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.