Technical Efficiency Analysis of Indian Drug and Pharmaceutical Industry: A Non-parametric Approach

Purpose– The purpose of this paper is to measure technical efficiencies, slacks and input/output targets for 50 large Indian pharmaceutical firms. Design/methodology/approach– The data are collected from Prowess of Centre for Monitoring of Indian Economy for the financial year 2010-2011. This study uses data envelopment analysis approach, taking raw material, salaries and wages, advertisement and marketing and capital usage cost as input variables and net sales revenue as output variable. Findings– The paper finds that out of 50 firms, nine firms were overall technical efficient while 19 firms pure technical efficient and thus defined the efficient frontier. The BCC model identified that the inefficiency is either due to inefficient managerial performance or scale utilization. Further, firms are classified as high, low and middle robust firms on the basis of peer count. The study also analysed the slacks which were found to be significant in regard of some inputs, especially advertisement and marketing. The targets setting results have shown that all the inputs have significant scope for reduction. Practical implications– The empirical results are useful in assessing the relative efficiency of the large Indian drug and pharmaceutical industry (ID&P) firms. The managers and owners can take corrective actions to reduce the cost of operations by optimizing advertising and marketing cost, capital usage cost and salary and wages so as to improve their efficiency. Originality/value– Unlike the previous studies on the efficiency of the ID&P industry, the paper have shown the significance of improvement in managerial performance and scale utilization. In addition to this, excess inputs used in the production process and also possible target values of inputs and outputs are shown in the study. The robustness and stability of efficiency scores is also checked. Keywords: Technical efficiency, Data envelopment analysis, Robustness, Indian pharmaceutical industry, Slack