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Editorial Board A Refereed Monthly International Journal of Management
Prof. B. P. Sharma
(Editor in Chief)
Prof. Mahima Birla
(Additional Editor in Chief)
Dr. Khushbu Agarwal
(Editor)
Ms. Asha Galundia
(Circulation Manager)

 Editorial Team

Dr. Devendra Shrimali
Dr. Dharmesh Motwani
 

Firm Size and Performance with special reference to Multinational Pharmaceutical Firms

 

S.FELIX SOPHIA,

Research Scholar,

Department of Commerce and Financial Studies,

Bharathidasan University.Tiruchirapalli, India.

Dr.J.GAYATHRI,

Assistant Professor,

Department of Commerce and Financial Studies,

Bharathidasan University, Tiruchirapalli, India.

 

 

 

 

ABSTRACT

The study analyses firm size and its impact on the performance of the firm.The objective of the study is to analyze the relationship between firm size  represented by net sales and firm performance with reference to capital intensity, export intensity,  profit intensity,   research and development intensity, total forex earnings and total imports.Also it studies whether the size of the firm have an edge over their performance. Data for the study was collected from CMIE Prowess Database for the period of 10 years from 2007-2016. The statistical tools namely correlation, regression and Granger causality were used for the study. The results confirm that only total forex earnings, profitintensity,total imports and export intensity had an impact on the performance of the sample multinational firms during the study period.

Keywords:Foreign Subsidiary, Pharmaceutical Industry, Size, Firm Performance, Correlation, Regression and Granger Causality.

 

INTRODUCTION

A multinational corporation owns and manages business in six or more countries.Indian pharma industry is mainly operated and controlled by overriding foreign companies having subsidiaries in India due to availability of economical labor in India at low cost. Governments regulate their operations in various ways, including removing barriers to entry, restrictions on market concentration, and restrictions on vertical integration. Governments may also  indulge in monitoringoperators’ pricing and production practices or providing incentives for applicable conduct. There are a number of challenges that are faced when designing an effective performance measurement system. Measures need to be chosen to support the attainment of specific performance or conduct identified by the organization’s leaders to achievemanagerial goals. Thus, clearly defined goals/objectives and strategies are required for appropriate measures to support their attainment. Correspondingly the fundamental processes, drivers of performance, and the major competencies required by employees need to be identified before effective performance measurement can be achieved.The study analyses the performance of the sample firms using research and development intensity to check whether R&D activities which amount to innovation, leads to greater profitability of firms.  Profit intensity to detect whether firm’s performance can be measured by its profit rates,share of forex earnings which is the proportion of earnings  attributed to foreign exchange earnings, capital intensity is used to measure the performance as it indicates the total capital incurred by the firm in its operation and finally  the study considers export and imports to estimate their level of operations in international activities.

REVIEW OF LITERATURE

Beamish, Paul W. Karavis, Lambroset al  (1999) examined the impact of organizational factors on the export performance.Furthermore, firms that structure exports around subsequent stages of internationalization achieve progressively higher overall export.TakehikoIsobe,Shige  Makino and David B. Montgomery (2000) examined whether early movers and technology leaders attained superior performance in emerging economic regions.  The study found that both high commitment and early entry had positive impacts on the perceived economic performance of the Joint Ventures. Anthony Goren and Paul W. Beamish (2003), through an internalization theory,  suggested that the outdated concept of geographic scope should be split into two related, but more precise, elements of international asset dispersion and country environment diversity. Subsequently, affiliation between economic performance and international asset distribution is positive, but that country environment diversity is negatively associated with performance, with a positive interaction between them. SaradinduBhaduri& Amit S. Ray (2004) analysed how Technological Capability augments export competitiveness of Less Developed Countries enterprises by introducing quantifiable concepts of technological capability and estimating econometric models of firm-level export performance for two R&D-intensive industries in India, Pharmaceuticals and Electronics/Electricals. Andrew B. Bernard and J. Bradford Jensen,(2007) examined the effects of firm structure on the closure of manufacturing plants. Multi-plant firms and those owned by multinationals are less likely to exit. However, the superior survival chances are due to the characteristics of the plants rather than the nature of the firms. Aspasia Vlachvei and OuraniaNotta (2008) examined the impact of firm level variables on the growth of firms operating in Greece.  The paper analyzed empirically the factors affecting the growth of Greek firms. The results of the study show that the relationship between growth, size and the age of firms is very sensitive with respect to the methods of estimation and growth and size definitions. Natasha I.E. and Yanthi R.I. Hutagaol (2009)examined the relationship between R&D with firm’soperation and market performance.  The findings of the study indicate that all sample firms have reported their R&D activities accordingly tothe realistic accounting standard. However, the hypothesis testing results shows that there isno relationship between R&D and firm’s operation and market performance.Chandan Sharma (2012)   examined the effect of research and development (R&D) activities on firms’ performance for the Indian pharmaceutical industry. The study found that the performance of foreign firms operating in the industry is more sensitive toward R&D than the local firms and  propose further encouragement and incentives for doing in-house innovative activities in the Indian pharmaceutical industry.RehanaKouser, TahiraBano et.al, (2012) provided anprofound description of the inter-relationship between firm size, growth, and profitability of non-financial companies listed at Karachi stock exchange.  The study revealed that profitability had strong positive relationship with the growth of the firm; however size has less significant and negative impact on the profitability.ChitraSingla and Rejie George (2013) explored the nature of the relationship between a firm's internationalization and performance. The study found that business group affiliation and firm age positively moderate the I–P relationships, which signifies deeper institutional, resource-based, and legitimizing effects. The results  indicate the need for better mid-range conceiving to forge a more robust understanding of the role various organizational characteristics play in influencing the I–P relationship.

 

The previous studies analysed the performance of multinational companies and its subsidiaries mainly based on its research and development activities. It was found that the research relating to theperformance of multinational firms’ subsidiaries was not carried out. Thus the present study aims to fill the research gap.

STATEMENT OF THE PROBLEM

Multinational firms are often affected by investing whole of their resources in the foreign market without proper understanding of the operations. The subsidiaries meet challenges in maintaining or achieving competitiveness and profitability. An industrialized firm has to respond to a range of challenges, that include quick improvements in technology, reduction in employment and productivity, globalization of markets, and environment requirements .The present research study focuses on the analysis of performance of the firms belonging to the pharmaceutical industry based on their size.

 

OBJECTIVES OF THE STUDY

  • To analyze the relationship between the size and the performance of the multinational pharmaceutical firms during the study period.
  • To analyze the impact of the size on the performance of the multinational pharmaceutical firms during the study period.
  • To analyse the casual relationship between the size and the performance of the multinational pharmaceutical firms during the study period.

HYPOTHESIS OF THE STUDY

  • H01: There is no significant relationship between the size and the performance of the multinational pharmaceutical firms during the study period.
  • H02: There is no significant impact of the size on the performance of the multinational pharmaceutical firms during the study period.
  • H03: There is no casual relationship between the size and the performance of the multinational pharmaceutical firms during the study period.

 

METHODOLOGY OF THE STUDY

 

  • Selection of the Sample Size

 

The constituents of the  BSE S&P Index is considered for sample selection. TheIndex constitutes 500 companies. Out of these 456 companies are multinational.Among these 456 companies, the pharmaceutical  firms are chosen as sample, which amounts to 35 firms. Among these 35 companies, data was available only for 28 companies.Thus the sample companies are Abbott India Ltd., Ajanta Pharma Ltd., Astrazeneca Pharma India Ltd., Aurobindo Pharma Ltd., Cadila Healthcare Ltd., Cipla Ltd., Dishman Pharmaceuticals & Chemicals Ltd., Divi'S Laboratories Ltd., Dr.Reddy'S Laboratories Ltd., F D C Ltd., Glaxosmithkline Pharmaceuticals Ltd., Glenmark Pharmaceuticals Ltd., Indoco Remedies Ltd., Ipca Laboratories Ltd., J B Chemicals & Pharmaceuticals Ltd., Jubilant Life Sciences Ltd., Lupin Ltd., Marksans Pharma Ltd., Natco Pharma Ltd., Novartis India Ltd., Pfizer Ltd., Sanofi India Ltd., Strides Shasun Ltd., Sun Pharmaceutical Inds. Ltd., Suven Life Sciences Ltd., Torrent Pharmaceuticals Ltd., Unichem Laboratories Ltd. and Wockhardt Ltd.

 

  • Period of the Study

           The study covers the period of 10 years from 2007 to 2016. 

  • Source and Collection of the Data

            The secondary data relating to the study was collected from the CMIE “PROWESS” Database.

LIMITATIONS OF THE STUDY

This study suffers from the following limitations.

  • All the limitations of secondary data are also applicable to this study.
  • The study considered only the pharmaceutical Industry.
  • The periods of study covers data only for 10 years.
  • All the constraint of the tools are also applicable to this study.

ANALYSIS AND INTERPRETATION

Computation of the Variables

            The study considers size as the dependent variable which is  the natural log of Net Sales.The independent variablesare:Capital Intensity,Export Intensity , Profit intensity and R&D Intensity. Capital Intensity is calculated as Capital of a firm by Net Sales, Export Intensity is defined as Total Exports by Net Sales.Profit Intensity is Retained Profits of firms by Net Sales.R&D intensity is Expenses on R&D by Net Sales and Total Forex Earnings which refers to the Total value of earnings from foreign exchange transactions.

TABLE: 1 results of descriptive statistics of the sample fiRms during the study period

 

Mean

Std. Dev.

Skewness

Kurtosis

Jarque-Bera

CI

0.444919

0.36011

1.11944

4.101054

7.262386

EI

429.6221

266.2073

-0.168931

2.02484

1.242603

PI

1.571104

1.025081

-0.504302

6.511798

15.57501

RDI

0.425144

0.508466

2.544267

8.546955

66.10554

SIZE

9.424608

0.937975

0.010394

2.210941

0.726887

TFE

109019.1

133950.3

1.550019

4.40029

13.49955

TI

33059.68

39967.24

1.910707

6.20707

29.03659

Source: Data collected from Prowess Database and computed using E-views 7.0

CI= Capital Intensity, EI= Export Intensity, PI=Profit Intensity, RDI = Research and Development Intensity,TFE=Total Forex Earnings, TI=Total Imports

 

Table 1 shows the results of descriptive statistics for the pharmaceutical industry during the study period.  The mean value was positive for all the variables such as Capital Intensity, Export Intensity, Profit Intensity, Research and Development Intensity,Size,Total Forex Earnings and Total Imports for all the sample firms during the study period.Total Forex Earningsrecorded the highest mean value 109019.1andResearch and Development Intensity recorded the lowest mean value 0.425144.The volatilities (Standard Deviation)  exhibited high volatility except Capital Intensity, Research and Development Intensity and Size exhibited low volatility. The skewness was positive and skewed towards right except for Export Intensity and Profit Intensity which was negatively skewed and moved towards left. The Kurtosis value was greater than the normal distribution value 3 and its indicates leptokurtic distribution except for the variable Export Intensity and Size which was less than 3 and indicates platykurtic distribution. The Jarque-Bera was greater than 5 which indicates normality of distribution except for Export Intensity  and Size it was less than 5 which indicates non normality of the distribution.

 

TABLE 2: RESULTS OF CORRELATION ANALYSIS  OF THE  MULINATIONAL PHARMACEUTICALFIRMS DURING THE

STUDY PERIOD

 

   

PI

TFE

TI

EI

CI

RDI

Size

Pearson Correlation

0.282

.796**

.780**

0.070

0.120

-0.312

Sig. (2-tailed)

0.146

0.000

0.000

0.724

0.544

0.106

*. Correlation is significant at the 0.05 level (2-tailed).

 

 

 

**. Correlation is significant at the 0.01 level (2-tailed).

 

 

 

 

Source: Data collected from Prowess Database and computed using SPSS 16.0

CI= Capital Intensity, EI= Export Intensity, PI=Profit Intensity, RDI = Research and Development Intensity,TFE=Total Forex Earnings, TI=Total Imports

 

Table 2 shows the results of the correlation analysis of the sample firmsduring the study period. The variable Size witnessed significant ‘p’ value with Total Forex Earnings and Total Imports which reveals 79.6%  and 78% relationship between the variables. The impact of intermediate inputs on performance is sector-specific and cannot be generalized. Higher Imports reflects greater ability to import by exporting firms.In case of the pharmaceutical sector, raw materials are essentially the basic chemicals for the production which in turn acts as raw material for formulations and  they lead to increase in the Total Forex Earnings .Hence the null hypothesis Ho1: “There is no significant relationship between the Size and the Performance of the Multinational Pharmaceutical Firms during the Study Period” is rejected.

 

TABLE 3:  MODEL SUMMARY OF REGRESSION RESULT FOR

THE SAMPLE FIRMS DURING THE STUDY PERIOD

 

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

Durbin-Watson

 

1

0.912

0.832

0.784

0.436

1.968

 

a. Predictors: (Constant), RDI, TFE, PI, CI, EI, TI

b. Dependent Variable: Size

 

Source: Data collected from Prowess Database and computed using SPSS 16.0

CI= Capital Intensity, EI= Export Intensity, PI=Profit Intensity, RDI = Research and Development Intensity,TFE=Total Forex Earnings, TI=Total Imports

 

Table 3 shows the results of model fitness for the Size and Performance of the Sample firms with Size as dependent and Research and Development Intensity, Total Forex Earnings,Profit Intensity, Capital Intensity, Export Intensity and Total Imports as independent variables. It is noted that 91.2% of relationship was noticed between Size and Research and Development Intensity, Total Forex Earnings,Profit Intensity, Capital Intensity, Export Intensity, and Total Imports as independent variables. Further only 83.2% of variation in Size was explained jointly by the other independent variables. However the R square value is high which indicates the model is good.

TABLE 4: ANOVA RESULTS OF  THE SAMPLE FIRMS DURING THE STUDY PERIOD

 

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

19.764

6

3.294

17.335

0.00

Residual

3.990

21

0.190

   

Total

23.754

27

     

a. Predictors: (Constant), RDI, TFE, PI, CI, EI, TI

 

 

b. Dependent Variable: Size

 

 

 

 

 

Source: Data collected from Prowess Database and computed using SPSS 16.0

CI= Capital Intensity, EI= Export Intensity, PI=Profit Intensity, RDI = Research and Development Intensity,TFE=Total Forex Earnings, TI=Total Imports

 

The results of Analysis of Variance for the Size and Performance of the Sample firms with Size as Dependent and Research and Development Intensity, Total Forex Earnings,ProfitIntensity, Capital Intensity, Export Intensity and Total Imports as independent variables are presented in Table 4. The F statistic value was found to be 17.335. The ‘p’ value was 0.00 which is lesser than 0.05 at 5% level. Hence the Ho2: “There is no significant impact of Size on the Performance of the Multinational Pharmaceutical Firms during the Study Period” is rejected.

 

TABLE 5:  CO-EFFICIENT RESULTFORTHE SAMPLE FIRMS DURING THE STUDY PERIOD

 

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

8.873

0.239

 

37.134

0.000

PI

0.244

0.095

0.267

2.564

0.018

TFE

0.000

0.000

0.794

3.520

0.002

TI

0.000

0.000

0.253

1.246

0.226

EI

-0.001

0.000

-0.424

-3.592

0.002

CI

-0.183

0.310

-0.070

-0.591

0.561

RDI

0.206

0.212

0.112

0.973

0.341

a. Dependent Variable: Size

 

Source: Data collected from Prowess Database and computed using SPSS 16.0

 

CI= Capital Intensity, EI= Export Intensity, PI=Profit Intensity, RDI = Research and Development Intensity,TFE=Total Forex Earnings, TI=Total Imports

 

Table 5 explains the co-efficients of Size and the Performance of the Sample firms during the study period. It is to be noted from the results that the ‘p’ value of the variables Profit Intensity,Total Forex Earnings and Export Intensityalone was less than 0.05 among the selected variables. Profit being the important source of funding for Export initiatives of firm. Higher profit-earning firms can more easily face competitiveness in foreign markets. Export intensity reflects international competitive structure of a firm. The relationship between firm size and exports are mixed,the majority of the studies seem to emphasize a positive relationship. Other recent studies have found a positive relationship between firm size and export competitiveness. MNCs, with their primary focus on formulation production, perform better in the export market. Firm size is generally expected to have a positive relationship to export intensity as larger firms have more resources with which enter foreign markets.A large firm will be better able to exploit such scale economies and enjoy greater efficiency in production, enabling it to export more and inturn increase its earnings. It may also be able to spread this cost over a larger volume of export, which, in turn, makes it more efficient by reducing the average cost of exporting. Hence it is clear that among the selected variables Profit Intensity,Total Forex Earnings and Export Intensityalone had its impact on the Performance of the Sample Multinational Firms during the study period.

TABLE 6:    RESULTS OF GRANGER CAUSALITY TEST FORTHE SAMPLE FIRMS DURING THE STUDY PERIOD

 

Null Hypothesis:

F-Statistic

Prob.

Accept/Reject

Conclusion

 SIZE does not Granger Cause CI

1.052

0.367

Accept

No Causation

 CI does not Granger Cause SIZE

0.833

0.449

Accept

No Causation

 

       

 SIZE does not Granger Cause EI

0.859

0.438

Accept

No Causation

 EI does not Granger Cause SIZE

0.060

0.942

Accept

No Causation

 

       

 SIZE does not Granger Cause PI

0.905

0.420

Accept

No Causation

 PI does not Granger Cause SIZE

1.178

0.328

Accept

No Causation

 

       

 SIZE does not Granger Cause RDI

1.043

0.370

Accept

No Causation

 RDI does not Granger Cause SIZE

3.464

0.050

Accept

Unidirectional Causation

 

       

 SIZE does not Granger Cause TFE

1.033

0.373

Accept

No Causation

 TFE does not Granger Cause SIZE

0.371

0.694

Accept

No Causation

 

       

 SIZE does not Granger Cause TI

1.291

0.296

Accept

No Causation

 TI does not Granger Cause SIZE

1.179

0.327

Accept

No Causation

Source: Data collected from Prowess Database and computed using E-views 7.0

CI= Capital Intensity, EI= Export Intensity, PI=Profit Intensity, RDI = Research and Development Intensity,TFE=Total Forex Earnings, TI=Total Imports

 

Table 6 exhibits the results of Granger Causality for Size and Performance of the Pharmaceutical Industry Firms. The F – Statistic values  revealed Unidirectional Causation between the variables Size and  Research and Development Intensity.All the other variables recorded no causation with the size of the sample firms belonging to the pharmaceutical industry.Empirical studies show that large firms are more innovative.Since R&D activity involves a high level of risk that is difficult to eliminate , large firms may be more willing to take these risks as they can be diversified over a wider range of product lines. Third, the production outline in a large firm is more organized and routinized, which makes it easier for them to device a new innovation. Hence the null hypothesis Ho3: “There is no casual relationship between the size and the performance of the multinational pharmaceutical firms during the study period.” is accepted.

FINDINGS AND IMPLICATIONS

            The study examined the impact of the selected variables on the performance of the sample firms during the study period. The major findings of the study were:  The results of  correlation analysis indicate that size witnessed significant relationship with Total Forex Earnings and Total Imports. The sample firms had positive relationship with the  Size and Total Imports, Total Forex Earnings and Export Intensity as they exhibited increase in Net Sales by means of increase in their Export Intensity, Total Imports and Total Forex Earnings. The regression results showed that the model is good for all the sample firms during the study period. The variables namely Profit Intensity,Total Forex Earnings and Export Intensity had impact on the Performance of  the sample firms  during the study period. Granger Causality results indicate Unidirectional Causation between the variables Size and Research and Development Intensity.All the other variables recorded no causation with the size of the sample firms belonging to the Pharmaceutical Industry.Hence the study found that Export Intensity, Profit Intensity, Total Imports and Total Forex Earnings are closely related and they are the major determinants of the Size of the Sample Firms belonging to the Pharmaceutical Industry.

SUGGESTIONS OF THE STUDY

  • The sample firms should concentrate more on export activities
  • The sample firms should invest in R&D activities.
  • The government should provide some subsidy in enriching the R&D activities which play a major role in the case of pharmaceutical industry.

CONCLUSION OF THE STUDY

The study analysed the impact of  size on the performance of the sample multinational firms for the period of ten years from 2007 to 2016. The study revealed thattotal forex earnings, export intensity and total imports of the sample firms alone had its impact on the   size of the sample firms. the larger firms had an increase in the total forex earnings by means their positive impact on export intensity  and increase in total imports.   

REFERENCES

  1. Andrew B.Bernard and J. Bradford Jensen (2007).Firm Structure, Multinationals and Manufacturing Plant Deaths. The Review of Economics and Statistics.Volume 89 (2) 193-204.
  2. Anthony Goerzen and Paul W. Beamish (2003). Geographic Scope and Multinational

Enterprise Performance.Strategic Management Journal.Strat. Mgmt. J., 24: 1289–1306. 

  1. Aspasia Vlachveiand OuraniaNotta (2008). Firm Growth, Size and Age in Greek firms.International Conference on Applied Economics – ICOAE 2008 915.
  2. Chandan Sharma, 2012. R&D and Firm Performance: evidence from the Indian Pharmaceutical Industry. Journal of the Asia Pacific Economy. Vol. 17, No. 2,332–342.
  3. ChitraSingla and Rejie George (2013).Internationalization and performance: A contextual analysis of Indian firms. Journal of Business Research,66, 2500–2506.
  4. Natasha I.E. &Yanthi R.I. Hutagaol (2009) . The Analysis of R&D Impact on The Public Listed Companies’Performance in Indonesia.Journal of Applied Finance and Accounting 1 No.2, 339 – 350.
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  7. SaradinduBhaduri& Amit S. Ray (2004). Exporting through Technological Capability: Econometric evidence from India's Pharmaceutical and Electrical/Electronics Firms. Oxford Development Studies, Vol. 32, No. 1, 87-100
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