Economies of Scale in The Russian Pharmaceutical Industry: Empirical Assessments

Alexander B. Gusev and Maksim A. Yurevich

Journal of Applied Economic Research, 2024, vol. 23, issue 4, 1055-1076

Abstract: The prolonged sluggish development of the Russian pharmaceutical industry has been attributed to relatively low investment activity in the sector. This, in turn, has led to a high dependency on imported medicines in Russia. The aim of the research was to identify the economic factors contributing to the chronic undercapitalization of the industry. The main suspicion was the absence of economies of scale in a sector that requires high-tech equipment and numerous other material and intellectual resources, which automatically makes launching new productions and significantly expanding existing ones unprofitable. This assumption formed the central hypothesis of the study, which was supplemented by the presumption of the existence of a revenue threshold for enterprises. Comparing actual data with this threshold would make it possible to determine whether an organization experiences negative or positive economies of scale. Given the state licensing of pharmaceutical manufacturing activities, the scope of companies considered was precisely defined. The industry-specific characteristics of license-holding organizations and the availability of performance data from 2004 to 2023 in the SPARK-Interfax system enabled the formation of a final sample of 320 manufacturing enterprises and the methodological determination of the economies of scale, which was assessed using the capital productivity indicator (the ratio of revenue to the residual value of fixed assets). Considering the composition of the initial industry data, econometric models based on panel data were chosen as the tool for processing it. The modeling results established the presence of a positive and almost all-encompassing economies of scale in the pharmaceutical industry. This finding, firstly, indicates the non-economic nature of the low investment activity in the sector and, secondly, favorably characterizes the industry for investors as an "untapped field". The hypothesis of a revenue ceiling for enterprises, exceeding which would indicate a decrease in production efficiency, was not confirmed, emphasizing the almost unlimited commercial potential in the pharmaceutical industry. The methodology for assessing the industry economies of scale has the potential for application to aggregated groups of pharmaceuticals, which could make it practically significant for analytical support in making specific investment decisions.

Keywords: economies of scale; pharmaceutical industry; investment; productivity; SPARK (search for similar items in EconPapers)
JEL-codes: L25 L65 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:aiy:jnjaer:v:23:y:2024:i:4:p:1055-1076

DOI: 10.15826/vestnik.2024.23.4.041

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