An Analysis on the Determinants of Efficiency of the Pharmaceutical Firms using Stochastic Frontier Analysis

Sakong, Jin; Kim, Jeongkyu

Abstract

BACKGROUND
& METHODS: The purpose of this research is to estimate the efficiency of the pharmaceutical firms and the determinants of their efficiency. Stochastic frontier analysis(SFA) and panel study are applied to the data of 60 domestic pharmaceutical firms from 2006 to 2012.
RESULTS
& CONCLUSION: First, the result of the stochastic frontier analysis shows that overall efficiency of the pharmaceutical firms is increasing as time goes by. However, if firms are classified by the scale, the larger firms show more efficiency and if classified by the degree of innovativeness, the innovative firms show more efficiency compared to the non-innovative firms. This evidences show that the scale and R&D investment have significant relationships with the efficiency of the pharmaceutical firms. Therefore, it is necessary to increase the national level of investment for the fundamental researches to vitalize R&D of the new drugs. Second, the result of estimation of the determinants of efficiency shows that the firms with larger sales promotion expenses and entertainment expenses have less efficiency compared to the other firms. This can be explained by the structural characteristics of the small generic pharmaceutical firms. Therefore, the government had better make the pharmaceutical firms to reduce sales promotion and entertainment expenses and increase R&D expenses by introducing systems such as global budgeting system on medicine or reference pricing system.