Determinants of Export Success – A Review of Indian Pharmaceutical Industry SatyanarayanaRentala Dr. Byram Anand Doctoral Scholar Asst. Professor Department of Management Pondicherry University, Karaikal
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Abstract : Investigating the success factors of export performance is an extensively researchedfield of international business.Earlier research was reported in the context of various industries in different nations across the world. The main objective of this research paper is to understand the determinants of export performance in the context of an emerging economy like India. The study considers 147 firms belonging to Indian pharmaceutical industrywhich is considered to be an industry with immense export potential in the years to come. The period considered for the research is from 2005-2013.Export sales value was considered as the dependent variable in thisempirical research study. The independent variables considered for the study are size of the firm, research and development expenses, profitability, age, advertising expenses, capital intensity, import of raw materials and import of capital goods. The findings of this research indicate that all the independent variables except the import of capital goods have a significant impact on the export performance of Indian pharmaceutical firms. The research approach used in this paper can be extended to other Indian industries to validate the findings of this research and enhance the understanding of the factors affecting export success in the Indian context.
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Keywords: Determinants, Performance, Export Success, Pharmaceutical Industry
Export Indian
1. Introduction The pharmaceutical industry in India is one with great potential among the emerging markets of the global pharmaceutical industry. Due to India’s adherence to the WTO agreement, Indian pharmaceutical industry has an opportunity to expand the export potential for Indian pharmaceutical products. This is possible since Indian pharmaceutical industry is in a position to offer medicines at affordable prices not only to the developed markets but also the developing markets in the world. The rising healthcare costs in different nations across the world provide an opportunity to expand the scope of pharmaceutical exports from India. This can be achieved since the Indian pharmaceutical industry can offer branded medicines at competitive prices to developed markets; at the same time it can also offer branded-generic medicines to the developing countries. Table 1 gives an account of the top five export categories from India. It can be seen that India’s pharmaceutical products are ranked fifth among all the product categories that are exported from India. This indicates the export potential of Indian pharmaceutical industry. July 2014
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Table 1 Apr-Aug Category 2013 Petroleum Products 147.9 Gems and allied Products Transportation Equipment Machinery Products Pharmaceuticals
% Share 20.4
97.7
13.5
48.9
6.8
37.2
5.1
35.5
4.9
Source:DGCIS,Kolkatta http://www.dgciskol.nic.in/data_information.asp; accessed on 2nd September 2013; % Share as per 2013 Values
It therefore becomes very pertinent and helpful to examine the determinants which influence the export success of Indian pharmaceutical firms. This researchattempts to explore a few important success factors of export performance of Indian pharmaceutical industry. This paper is structured as follows: Following Section 1 which gives a brief introduction about the significance of this study, a note on the empirical literaturethat includes the most related studies is presented in Section 2. Section 3 describes the methodology used for the study, the data employed and the variables included for the research. Section 4 highlights the key findings of the analysis. At the end, this empiricalanalysis presents the conclusions of the study along with a note on the avenues for future research. 2. Literature Review Many scholars have earlier analyzed the determinants of export performance of Indian firms.In line with the resource-based view (RBV) postulated by Barney (1991), many studies in the Indian context have analyzed the impact of firms’ internal resources on ISSN -2348 - 0092
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export performance. Size of the firm, capital intensity, research and development (R&D) expenditures, advertising spending and technological abilities are some of the internal resources examined by various researchers in the context of the research on determinants of export performance. Some of the very important Indian studies on determinants of export performance include the studies by Aggarwal (2002) who offered evidence regarding the export performance of 916 firms operating in 33 different manufacturing industries in India. Bhaduri and Ray (2004) investigated the impact of technological strengths on export performance of Indian electronics and pharmaceutical firms. Bhat and Narayanan (2009) reported findings of the research on export determinants of 121 organisations belonging to Indian chemical industry. In his research, Chadha (2009) studied the export performance determinants of 131 Indian healthcare firms. Ganguli (2007) reported the export success factors of 165 firms belonging to Indian iron and steel industry. Jauhari (2007) analyzed the export performance of 164 firms that belong to the electronics industry in India. Kumar and Saqib (1996) analyzed the impact of R&D expenditures on export performance of 291 firms belonging to various manufacturing industries in India. Majumdar (2010) studied the influence of R&D spending on export intensities of Indian IT and software firms. Pradhan (2007) investigated the export intensities of various firms in Indian manufacturing industries. Siddharthan and Nollen (2004) examined the export performance of firms from Indian IT industry. Singh (2009) extensively studied the export performance determinants of 3542 Indian firms that belong to multiple sectors of Indian industry. July 2014
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In their seminal paper, Kumar &Siddharthan (1993) investigated the export success factors of 640 Indian organizations belonging to 13 different industries. The study’s chief contribution lies in its categorization of various industries into high-technology, medium-technology and low-technology industries. This study helped the researchers in the following years to examine the export performance of Indian firms by considering the firms’ technological capabilities measured by the R&D expenditures. It is important to note that all the earlier studies have either studied the determinants of export performance of Indian firms belonging to a single industry or multiple industries (two and more). While the single-industry studies
Dependent Variables Export Intensity, Export Sales and Export Growth
Table 2 Independent Variables Firm size (sales); R&D expenditure; Import of capital goods; Import of raw materials; Firm age; Advertising expenditure; Profitability; Capital Intensity; Capital-output ratio; Foreign equity (FDI); royalties paid
3. Methodology, Data and Variables Data regarding the Indian pharmaceutical firms has been obtained from the Centre for Monitoring Indian Economy (CMIE)-Prowess database. Out of all the pharmaceutical firms listed in the database, 147 have been included in the study considering the availability of data. The time period considered for the study was from 2005-2013 (nine years). The data taken for the study is an unbalanced panel with 10656 firm observations. Export Sales was considered as the dependent variable and eight independent variables have been included in this research to understand their impact on export performance of Indian pharmaceutical firms. The operational definitions of the dependent and independent variables are presented in Table 3. Multiple ISSN -2348 - 0092
were able to control for the firm heterogeneity, the multiple-industry studies were able to highlight the inter-industry differences in putting forth the findings regarding the determinants of export performance. In most of the studies, export intensity (measured as export sales divided by total sales of a firm) was considered to be the dependent variable. Many independent variables were considered by the earlier researchers in understanding the determinants of export performance of Indian firms. A summary of the most frequently used dependent and independent variables is presented in Table 2.
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regression approach was used to investigate the impact of various determinants on export performance of Indian pharmaceutical firms. The regression equation used for the analysis is given as follows: Exp= α+β1Sales+β2RD+β3PAT+β4AGE+β5ADV+β 6NFA+β7ICG+β8IRM+ε
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Table 3: Operational Definitions of Dependent and Independent Variables S. No. 1
Variables
Operational Definition of Variables
Dependent Variable EXP
Export Sales of the firms (Rs. millions)
Independent Variables 1
RD
R&D Expenditure of the firms (Rs. millions)
2
SALES
Total sales of the firms (Rs. millions)
3
ADV
Advertising Expenditures of the firms (Rs. millions)
4
PAT
Profit after Tax of the firms (Rs. millions)
5
NFA
Net Fixed Assets of the firms (Rs. millions)
6
AGE
Age of the firms from date of incorporation (years)
7
ICG
Import of Capital Goods of the firms (Rs. millions)
8
IRM
Import of Raw Materials as percentage of total raw material purchases
4. Findings and Discussion Table 4 gives the information regarding the descriptive statistics of the dependent variable and various independent variables used in the study. Table 4: Descriptive Statistics Mean
Standard Deviation
Minimum
Export Sales (Rs. mn)
2233.9
6260.9
0.0
Maximu m 62865.0
RD (Rs. mn)
265.1
788.4
0.0
7988.4
Sales (Rs. mn)
4926.0
9383.8
0.0
83946.0
PAT (Rs. mn)
696.2
4027.4
-30517.3
128969.1
Age (Years)
31.3
20.6
6.0
112.0
Advertising (Rs. mn)
77.1
275.9
0.0
3036.2
Imp. Of Capital Goods (Rs. mn)
79.3
242.5
0.0
2773.0
RM Imports % (Rs. mn)
25.7
26.1
-45.8
258.0
Net Fixed Assets (Rs. mn)
1858.0
3472.8
0.0
34182.9
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Table 5 presents the multiple regression results of the various determinants of export performance of the Indian pharmaceutical firms.It can be observed that among all the independent variables, except import of capital goods, all the other independent variables (size of the firm represented by
sales, research and development expenditure, profitability, age of the firm, advertising expenditure, net fixed assets and import of raw materials) have exhibited a significant impact on the export performance of Indian pharmaceutical firms.
Table 5: Multiple Regression Results for Export Success Variable Constant Sales RD PAT AGE ADV NFA ICG IRM Adj. R2
Coefficient -0.060 1.453 0.308
t value 0.000 7.048 12.469
p value 1.000 0.000** 0.000**
-0.053 -18.563
-2.567 -4.612
0.010** 0.000**
-0.722 4.172 4.740 0.296
-2.180 7.577 1.492 5.267
0.029* 0.000** 0.136 0.000**
0.790 F value 627.224 ** and * indicates statistical significance at 1% and 5% levels respectively Sales, R&D expenditure, net fixed assets and import of raw materials show a significant and positive impact on export performance while profitability, age of the firm and advertising expenditure exhibit a significant but negative influence on export performance of Indian pharmaceutical firms. The results obtained in this research study are in conjunction with the results of most of the earlier studies as explained below. The results reported by Aggarwal (2002) indicated that R&D expenditure had a significant impact on export intensity only in medium-high technology industries but not in the other industries. In the study by Bhaduri& Ray (2004), the results indicated ISSN -2348 - 0092
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that in case of pharmaceutical and electronics industries, firm size and R&D expenditures had a positive and significant impact on export performance. Similarly, firm age had no significant effect on export performance in pharmaceutical industry while it exhibited a negative impact on the electronics industry. Bhat& Narayanan (2009) reported that R&D expenditures, size of the firm, import of raw materials, choice of technology and advertising intensity had a favorable impact on export performance. Age of the firm did not show any significance on the export performance. Findings of the study by Chadha (2009)indicated that export sales July 2014
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were positively and significantly impacted by technology (investments in R&D), sales and profits of the pharmaceutical firms in India. Ganguli (2007) found no significant relationship of export performance with size and age of the firms in the iron and steel industry but found a significant relationship with capital intensity of the firms. The study also reported no significant relationship of export intensity of the firms with the economic performance indicator, ROA. The results of the study by Jauhari (2007) concluded that export intensity has a significant relationship only with the size of the firm, capital output ratio and FDI. Kumar &Saqib (1996)indicated that there is a positive and significant effect of R&D intensity on export performance of the firms. Lall (1983) reported a positive and significant association of all the variables with R&D expenditures excepting export intensity and wages paid. Lall& Kumar (1981) observed in their study that there is a negative association of export performance with profitability and technological activity but a positive association with firm size. Pradhan (2007) concluded that all the variables excepting age of the firm, technology imports and advertising expenses have shown a significant and positive relationship with export intensity of the firms. Kumar and Siddharthan (1993) in their influential study on determinants of export performance of Indian industries, found that R&D expenditure intensity showed a positive and significant association in transportation equipment, man-made fibers, paper and rubber product industries. Technology imports were positive and significant only with paper products, rubber products, non-electrical machinery and ISSN -2348 - 0092
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electrical machinery industries. Firm size was found to be positive and significant with textiles, cement, paper, man-made fibers, rubber tyres, electrical and non-electrical machinery industries. Advertising intensity was found to be significant with a positive sign in case of fabricated metal products, paper, transportation equipment, rubber products and pharmaceutical industries. Capital intensity was positive and significant in only two industries (electrical and pharmaceutical). Profitability (measured as profit before tax to sales ratio) was found to be positive and significant with only four industries (cement, transportation equipment, non-electrical equipment and pharmaceuticals). Majumdar (2010) reported that R&D expenditure exhibited a significant and positive impact on export performance of Indian IT firms. Raut (2003)indicated that R&D expenditures increased the firms’ likelihood to export and that firm size had no impact on the technologically-light industries but exhibited a negative and significant association with firms in the heavy industry. Siddharthan & Nollen (2004) concluded that FDI and technology imports had a positive and significant relationship with export intensity among MNEs while capital imports and size of the firm exhibited a significant but negative relationship. In the licensee firms, capital output showed a positive and significant relationship with export intensity while technology imports showed a significant but negative relationship. Among the domestic firms, import of raw materials, size of the firm and capital output have shown a positive and significant relationship with export intensity while capital imports had shown a significant but negative relationship.Singh (2009) concluded that July 2014
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domestic sales positively affect export sales of the firms and that they are interdependent on each other. R&D expenditure exhibited a positive and significant relationship while advertising expenditure has shown a negative relationship. It can be observed from the above discussion that the findings of this research on the export success factors of Indian pharmaceutical firms validate the findings of the earlier studies though there were a few inconsistencies with the earlier findings. The inconsistencies can be attributed to the fact that many of the earlier studies were multiindustry studies and that some of the earlier research was done when India had just opened up its economy through liberal economic policies after 1991 and it did take some time for the liberal policies to exert a positive influence on export performance of Indian industries. Conclusions This research paper explored the determinants of export success of Indian pharmaceutical firms using multiple regression approach. Based on the resource based view (RBV) put forward by Barney (1991), this research investigated the impact of firms’ internal resources on their export success. Among all the independent variables used for the study, except for the import of capital goods, all the other variables have shown a significant influence on export success of Indian pharmaceutical firms. The results of this research can provide guidance to practitioners of export marketing in the Indian pharmaceutical industry. The results indicate the internal resources that need to be focused upon by the practitioners. The results also give future pointers to academic researchers. The research approach ISSN -2348 - 0092
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used in this paper can be used to extend the research to other Indian industries to facilitate better understanding of the determinants of export performance.The post-liberalization era of the Indian economy has helped in the rapid growth of Indian pharmaceutical industry by helping the growth of the firms through an increase in pharmaceutical exports. This trend portends well for the export potential of the firms belonging to Indian pharmaceutical industry. References 1. Aggarwal, A. (2002),“Liberalisation, multinational enterprises and export performance: Evidence from Indian manufacturing”,Journal of Development Studies, 38(3), 119–137. 2. Barney, J. (1991),“Firm resources and sustained competitive advantage”, Journal of Management, 17(1), 99–120. 3. Bhaduri, S.& Ray, A. S. (2004), “Exporting through technological capability : Econometric evidence from India’s pharmaceutical and electrical/electronics Firms”,Oxford Development Studies, 32(1), 87–100. 4. Bhat, S., & Narayanan, K, (2009),“Technological efforts, firm size and exports in the basic chemical industry in India”,Oxford Development Studies, 37(2), 145–169. 5. Chadha, A. (2009),“Product cycles, innovation, and exports: A study of Indian pharmaceuticals”,World Development, 37(9), 1478–1483. 6. Ganguli, S. (2007),“Export performance analysis of business groups and standalone organizations in the Indian iron and steel industry”The ICFAI Journal of International Business, II (4), 40–50.
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7. Jauhari, V. (2007), “Analysing export intensity of the select electronics firms in India”, International Journal of Innovation Management, 11(3), 379– 396. 8. Kumar, B. N., &Siddharthan, N. S.(1993),“Technology, firm size and export behaviour in developing countries: The case of Indian enterprises”, INTECH Working Paper, (9), 1–34. 9. Kumar, N., &Saqib, M. (1996),“Firm size, opportunities for adaptation and inhouse R&D activity in developing countries: the case of Indian manufacturing”, Research Policy, 25, 713–722. 10. Lall, S. (1983),“Determinants of R&D in an LDC: The Indian engineering industry”, Economic Letters, 13, 379– 383. 11. Lall, S., & Kumar, R. (1981),“Firmlevel export performance in an inwardlooking economy: The Indian engineering Industry”, World Development, 9(5), 453–463.
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12. Majumdar, S. (2010),“Innovation capability and globalization propensity in India’s information technology and software industry”, Information Technologies and International Development, 6(4), 45–56. 13. Pradhan, J. P. (2007),“How do Indian multinationals affect exports from home country?”Working Paper, (April), 1–41. 14. Raut, L. K. (2003),“R&D activities and export performance of Indian private firms”,Working Paper, (1), 1–24. 15. Siddharthan, N., &Nollen, S, (2004),“MNE Affiliation, firm size and exports revisited: A study of information technology firms in India”,Journal of Development Studies, 40(6), 146–168. 15. Singh, D. A. (2009).”Export performance of emerging market firms”,International Business Review, 18, 321–330.
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