Productivity Dynamics in the Indian Pharmaceutical Industry: Evidence from Plant-level Panel Data

Abstract

This article investigates the effects of plants’ dynamics on productivity growth in the Indian pharmaceutical industry across five regions, north, northwest, west, south, and the rest of India, during the period from 2000–01 to 2005–06, using the unit-level panel database drawn from the Annual Survey of Industries. The selected regions differ in the degree and age of agglomeration of the pharmaceutical industry. The empirical analysis is based on the decomposition methodology of aggregate productivity growth. This methodology decomposes productivity growth between two points in time into the contribution from four broad factors: improvement in incumbents’ productivity (within effect), reallocation of resources from less productive to more productive producers (reallocation effect), entry of more productive firms (entry effect), and exit of less productive firms (exit effect). Our empirical findings reveal that productivity growth is relatively higher in the agglomerated regions. Furthermore, the effects of plant dynamics on productivity growth differ with the age of the agglomeration. Rather large positive entry effects are found in the region where the formation of agglomeration is a recent phenomenon. In the mature region, reallocation effects of surviving plants are large and robustly positive. In other areas, however, ‘within effects’ of surviving plants are robustly positive.