Impact of R&D on profitability in the pharma sector: an empirical study from India
Abstract
Purpose
The purpose of the current paper is to examine the nature of profit persistence and to estimate the dynamic relationship between research and development (R&D) intensity and firm profitability in the Indian pharmaceutical industry.
Design/methodology/approach
A dynamic panel data model with generalized methods of moments (GMMs) technique has been deployed to estimate the relationship between R&D intensity and performance. Arellano and Bond (1991) estimation methodology has been used to generate the estimates. A sample of 55 publicly listed firms operating in the Indian pharmaceutical industry for the period 2005-2014 has been considered.
Findings
The study finds moderate to heavy profit persistence in the Indian pharmaceutical industry. The study also finds that there exists a positive relationship between R&D intensity and performance for the Indian pharmaceutical Industry. The results hold even after considering two separate measures of profitability – return on assets and return on sales. The results also hint at a possible non-linear relationship between R&D intensity and profitability.
Research limitations/implications
The results highlight positive profit persistence among pharmaceutical firms. The results also highlight the need for a sustained investment in R&D, as its benefits are driven in the long run. Thus, managers should devise proper policies R&D investments. Also, prospective entrants should properly study the existing entry barriers before deciding upon the mode and timing of entry.
Originality/value
The degree of profit persistence and the dynamic nature of relationship between R&D intensity and firm performance in the Indian pharmaceutical sector has not been studied. Thus, this paper fills this gap and also highlights the impact of certain firm- and industry-specific variables on profitability.
Keywords
Acknowledgements
The author would like to thank Dr Kakali Kanjilal, Associate Professor, IMI, New Delhi, India, for her continuous guidance and support at all levels of writing the article. The author would like to thank the editor and area editor of JABS for their valuable feedback. The author also thanks two anonymous reviewers for providing their feedback and comments.
Citation
Jaisinghani, D. (2016), "Impact of R&D on profitability in the pharma sector: an empirical study from India", Journal of Asia Business Studies, Vol. 10 No. 2, pp. 194-210. https://doi.org/10.1108/JABS-03-2015-0031
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