DETERMINANTS OF ENTRY MODE IN INDIAN PHARMACEUTICAL INDUSTRYicmrr.org/global/pdffiles/IJFRR/f201606007.pdf · company from developing economy plans to enter foreign market, the first

DETERMINANTS OF ENTRY MODE IN INDIAN PHARMACEUTICAL

INDUSTRY

AMISHA GUPTA

B-9 Shakti Nagar Extension Delhi

ABSTRACT

Entry strategies are one of the important decisions in the process of internationalization. Decision on

entry mode is one of the most critical decisions having significant and far-reaching consequences on a

firm's performance and survival in the target foreign market. This study focuses on export as an entry

mode and makes an attempt to identify the major determinants influencing entry mode decision of

Indian pharmaceutical industry using logit model. Firm level data of 52 pharmaceutical firms for the

period 2002 -2013 has been used in the analysis. Impact of both firm specific and country specific

factors on entry decision has been modelled. Result of the analysis revealed that among the firm

specific factors, R&D intensity and distribution intensity significantly influenced entry decision.

Relevance of country specific factors became evident as in their presence, sign and significance of

firm specific factors changed, indicating the strong influence of these factors on entry decision of the

firms. The study concludes that both firm specific as well as the policy changes at the country levels,

host country‘s as well as domestic policies together influences the decision of the firm on entry mode.

Keywords: Entry Modes, Internationalization, Entry Strategies.

1 INTRODUCTION

The emergence of developing-country multinational enterprises in a variety of industries is one of the

characterizing features of globalization. Be it an old age textile industry or innovating pharmaceutical

industry all are highlighting scope in international market. As like developed economy when any

company from developing economy plans to enter foreign market, the first and the foremost thing that

they have to do is to select an appropriate entry mode for serving that particular market. Entry modes

include exporting, licensing, franchising, management contract, joint venture, and sole proprietorship.

Choice of entry mode is one of the most critical decisions in foreign market entry (Root, 1994).

Inappropriate entry mode can have significant and far-reaching consequences on a firm's performance

and survival in the target foreign market (Gatignon and Anderson, 1988; Li, 1995; Mathe and Perras,

1994). In addition to blocking growth opportunities, an inappropriate entry mode could substantially

limit the strategic options available to the firm in the new market (Alderson, 1957). Each entry mode

is associated with a certain level of resource commitment, investment risk and control of the foreign

affiliate. Studies have observed that the characteristics of MNCs from developing economies differ

from those of comparable MNCs from developed economies (Aggarwal and Agmon, 1990; Buckley,

2004; Mathews, 2002 and 2006; Mirza, 2000; Moon and Roehl, 2005).

Hence, an important research and managerial question that arises in this respectis to evaluate all the

factors that influence the selection decision for the firms during internationalization and the predictive

expertise of the theory. This study makes an attempt to identify the major determinants influencing the

entry mode decision of Indian enterprises in foreign market. This is examined using the case of Indian

pharmaceutical industry which globally stand 4th

largest in volume and 12th

largest in value with

estimated current turnover as US$ 30 billion ( IDMA, World Global Repot, 2014).

INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEWISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:1.552VOLUME 4, ISSUE 6, JUNE 2016

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www.icmrr.org 63 [email protected]

2. LITERATURE REVIEW

A considerable number of different studies from the market entry research path have been used in the

literature to explain how companies make their decision to enter a foreign market. Subramanian,

Sachdeva and Morris (2001) discussed the trends in India's outward FDI and attempted to identify the

driving factors behind it. The interest in market entry mode choice originates from the theory of

international investment. It was studied as a problem with distinctive feature, form and pattern of

international production (Southard 1931; Hymer 1960; Caves 1971 and 1974; Dunning 1958 and

1977). It was also discussed as a critical issue in international marketing by many economists and

marketing experts. Wind and Perlmutter (1977) and Root (1994) argued that the choice of market

entry mode has great impact on international operations and can be regarded as ―a frontier issue‖ in

international marketing. Kumar and Subramaniam (1997), Chung and Enderwick (2001), as well as

Nakos and Brouthers (2002) emphasized that the choice of market entry mode is a critical strategic

decision for firms intending to conduct business overseas. Being such an important issue market entry

mode choice became the object of numerous studies and researches developed to understand and

explain associated phenomena. W ChanKin, Pter Hwang (1992) directed establishing the importance

of global strategic consideration in selecting entry modes. They believe that apart from transactional

and environmental factors there could be some strategic issues guiding the firm behavior for

internationalization. Aggarwal and Ramaswami (1992) examined the independent and joint influence

of location advantage, internationalization advantage and ownership advantage explains the selection

of entry modes in international market. Kogut and Singh (1988) claimed the influence of national

culture on entry mode decision. Buckley and Casson( 1998) emphasized the strength of competition

from indigenous rivals as a determinant of entry strategy into both production and distribution. Pan

and Tse (2000) proposed and demonstrated the hierarchal model of entry modes. They believed that

there are factors that exert substantial influences at the equity versus non-equity level of entry mode.

Sayan Chatterjii (1999) tried to integrate the utilization costs and the entry modes for

internationalization. Bell, Barkema and Pennings (1996) examined the longevity of an enterprise in

foreign market. Results show Cultural distance is a prominent factor in foreign entry. Herrmann and

Datta (2002) summarized the relationship of CEO characteristics and entry mode selection. Erramilli,

Agarwal and Dev (2002) explained how organizational capabilities influence the selection of entry

modes as equity and non equity. As an extension to the study researchers also attempted to explore

the response of the firms to environmental changes. In 1998, A. Sharma explored if the impact of firm

specific variables and other variables differs for a firm for pre entry period and the post entry period.

In 2002, Harzing came with a very unthought variable for entry mode: International strategy followed

by MNC's . He believed that international strategy followed by MNC's has a significant explanatory

power in the choice of entry mode . Brown, Dev and Zhou (2003) argued in their paper that the entry

mode should not be guided only by ownership and control factor. Rather it should be expanded to

production and distribution factors as well. A.Sen (1998) conducted an entry strategy survey

explaining that whenever firm made an effort to enter a new country , there are plenty of option as an

entry modes are available. Entry strategy is a one short preposition. Firms have to highly consider the

scale of their entry to decide the entry mode. In 2007 Elango and Pattnaik explained how firms from

emerging economies expand abroad using the experience that they have learned from their parental

networks.Fisher (1997) pointed out that the international experience of a management team is

positively related with the development of strategic partners and foreign sales. Pan (1999) examined

the impact of order and mode of entry on firm performance in foreign markets.

As could been seen from the discussion above, most of the existent studies aimed to explore the

factors which are related to market entry mode choice and their impacts. In fact, there are a lot of


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factors that have to be taken into account in relevant research and practice. Root (1994) altogether

identified 22 factors influencing market entry mode decision, but one has to suppose that there are still

more. One of the main problems regarding the market entry mode decision is the fact that it is ill-

defined, complex and dynamic (Kumar and Subramaniam 1997; Young et al. 1989). It is a function of

various factors and their interactions. And of course not all factors have equal importance. Moreover,

the same factors may play a different role in different contexts. People studying the problem with

different expectations may arrive at different conclusions. Different samples selected, different time

period analyzed, different methodologies used, or even different skills of the analysts may also induce

conflicting results, especially in empirical studies. Some Researchers just failed to find great

congruence on the impact of international experience. Some have argued that a firm‘s level of

international involvement is positively related to international experience, i.e. the more international

experience a firm possesses, the more efficient it is to adopt an entry mode with a higher level of

control. Nakos et al. (2002), Anderson and Ga- tignon (1986), as well as Davidson (1980 and 1982)

supported this idea explicitly. The counter-argument (Weichmann and Pringle, 1979) is that

international experience is negatively related to international involvement, i.e. the more international

experience a firm has the more efficient it is to adopt entry mode with a lower level of control. This

theory is based on the ethnocentric orientation of many international neophytes. Ethnocentrism leads

inexperienced firms to demand high ownership first in order to explore its advantages by holding key

positions. Later on when the firm has acquired local knowledge and when it has adapted to local

conditions shared ownership or a low degree of ownership is preferred. However, some others

argued through empirical studies that international experience has no significant relation with the

choice of entry mode (Brouthers 2002; Chung and Enderwick 2001). Cultural distance was another

arguable factor. Some economists or marketing experts point out that the cultural distance between the

home and the host country discourages the ownership involvement, i.e. it is negatively related to the

level of control. This viewpoint was supported by Erramilli and Rao (1993), Gatignon and Anderson

(1988), as well as Kogut and Singh (1988), and may be explained by managers shying away from

ownership involvement when they have no or solely inconsistent knowledge about local values or

operation methods (Root 1994; David- son 1980 and 1982), or by managers undervaluing the

investment due to uncertainty caused by cultural distance (Root 1994), or by high information

collecting costs due to cultural distance or by high managerial costs, e.g. due to required trainings.

On the other hand, some economists argue that cultural distance encourages owner-ship involvement.

This can be explained by the fact that ownership makes it possible to do things in its own way which

is assumed to be more efficient and more advantageous (Hymer, 1960). This viewpoint was supported

by empirical studies of Anand and Delios (1997) as well as Padmanabhan and Cho (1996).

The entire literature is very much focused on single factor, ignoring the impact of comprehensive

factors on entry modes decision. Researchers like Alvarez and Marin (2004) only highlights the

structural transformation in the host country as in factor influencing the entry decision. Mei-Chung

(2009) explains technology diffusion as the only factor influencing the entry decision. Very few

studies generalize their findings to all the industry. Like Buckley and Casson (1998) ignores the

impact on service sector. Ridder (2010) is very specific in analyzing the impact of psychical distance

on a software company of Europe. Researchers have also been selective in selecting the dependent

variables for their study. Most of the researchers have selected any two entry modes as the dependent

variable considering others as silent. Moreover, the available literature is highly geographically

concentrated. However, non equity modes of entry play a very important role. Reviewed literature is

silent about this aspect of entry mode.


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3. INDIAN PHARMACEUTICAL INDUSTRY

The increasing interest of Indian Pharma companies in outside world can be witnessed in increasing

deals of cross border mergers and acquisitions. India is ranked 4th largest country (Indian Drug

Manufacturing association, 2015) in terms of pharmaceutical production volume. The industry exports

about Rs 90,000 Crore (over US $15 billion) annually with an average growth rate of 22%. Although

Indian pharmaceutical industry is a very powerful industry it has recently earned global recognition

with innovatively engineered generic drugs, active pharmaceutical ingredients (API), outsourced

clinical research, and contract manufacturing and research. India has signed various MOU's with

China Pharmaceutical Association and Korea Pharmaceutical association for further growth,

development and expansion. As per the future estimates it is determined that global pharmaceutical

industry will set big opportunity for Indian pharmaceutical industry keeping in mind its competitive

advantage in generics. Generics are opening tremendous market for domestic players in international

market. Contract manufacturing industry is estimated to grow and generate USD 850 million annually.

Indian pharmaceutical sector registered the growth of 14.3% over FY 2015. It is suppose to be the

third largest producer in the world, which includes developing markets as well as highly regulated

market of U.S and EU. Considering the significant growth that pharmaceutical industry is bound to

generate in the coming years, it serves as the best representative of Indian Industries to study the

internationalization efforts of Indian companies.

Figure 1: Total revenues generated by India Pharma sector 2009-2013(US $ bn)

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013

Total Revenues

Total Revenues

4. METHODOLOGY

4.1 Theoretical Background

The entry mode decision of Indian pharmaceuticals companies have been examined based on the

Uppsala Model, U-Model, or process model of internationalization. Johanson and Wiedersheim-Paul

(1975) declared that first and the foremost step for any enterprise to expand abroad is to start with

exports. Henceforth exports intensity strongly represents the entry mode as dependent variable which

is a function of variables denoted Xit as a vector of k( k=1......k) elements capturing and explaining

the factors that influence the exports of ith

Indian pharmaceutical firms in tth time period.

The factors that influence the entry mode selection can be divided into four parts: country specific

factors, firm specific factors, industry specific factors and product specific factors. In current study the

focus is paid on the firm specific factors and country specific factors. Therefore Xit can be explained


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as a set of firm specific variables and country specific variables. Firm specific factors are assumed to

be dependent on parent firm- product specific knowledge, parent firm- marketing intensity , parent

firm – profitability and parent firm- location unfamilarity. Country specific factors are assumed to be

dependent upon state influence of home country, state influence of the host country and market

openness and FDI.

Firm Specific Factors

(i) Parent firm- product specific knowledge

Research of entry-mode choice based on the transaction-cost theory has used R&D intensity as a

proxy for asset specificity. Asset specificity refers to durable investments that cannot be redeployed to

alternative uses and by alternative users without a sacrifice of productive value (Williamson 1991).

Therefore as R&D intensity increases, durable investment increases, and more coordinated efforts are

required to resolve self-interested bargaining and disagreements between them. Due to the increased

costs associated with the coordinated efforts, a hybrid form of governance becomes less efficient

compared to a hierarchy form. Consistent with this view previous studies have suggested that the

degree of parent firm R&D in tensity (as a proxy for product specific knowledge) act as strong

indicator influencing the entry mode selection (Delios and Henisz 2000, Erramilli and Rao 1990,

Gatignon and Anderson 1988, Kim and Hwang 1992).

In case of Pharmaceutical industry of India, it is observed a set of policy reforms have been

introduced in the Indian pharmaceutical sector since mid-1990s, aimed at incentivizing the private

sector R&D. An implicit assumption that the Indian pharmaceutical firms have become capable of

developing new drugs underlined these reforms and it was expected that both the Indian firms and

MNCs would invest in R&D on new drugs not only for diseases that are prevalent globally but also

for diseases that are specific to India and other tropical countries. Perhaps initially when there was

low R&D intensity, it is explained by the fact that Indian companies were engaged primarily in the

manufacture of generics and development of non-infringing processes and not in new drug

development phase, which involves huge investments. The time is changing. The process patent

regime under the Patents Act 1970 enabled Indian companies to manufacture and market patented

drugs using non-infringing processes. With the change in the Government‘s approach to the private

sector and the creation of new incentive mechanisms , the R&D intensity has begun to increase . This

increase has entirely been accounted for by the private sector . Henceforth study aims to conclude this

increase in R&D intensity influence the entry decision.In much international business literatures, the

ratios R&D expenditures to sales are often used as a measures of intangiable assests. A firm

possessing high R&D capabilities may prefer to enter foreign market through full owner ship in order

to preserve and best exploit its techno logical know-how, given the imperfections existing in the

external market for technology (Caves 1982). Stopford and Wells (1972), Padmanabhan and Cho

(1996) and Delios and Beamish (1999) found that R&D intensity is related to full ownership structure

of foreign subsidiary. As a result, R&D ratio to sales stands as a strong variable to influence the entry

mode selection decision.

(ii) Parent firm – profitability

Some of the traditional theories like RBVF theory claims that one of the justifications for the growth

of a firm is that it has a resource surplus after investing the resources required to keep its current level

of activity. In fact, Penrose (1959) already argued that growth opportunities exist in the firm because

there are always unused productive resources. The availability of a financial resource surplus will


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make the firm more likely to adopt growth strategies entailing greater resource commitment

(Chatterjee and Wernerfelt, 1991). Chatterjee and Singh (1999) shared this view when they referred to

internal financial funds, which included liquid money and the unused debt capacity. Henceforth it can

always be said that firms profitability act as a strong variable to influence the entry mode selection.

Many reserachers of entry modes have used ROA (return on assets) ratio as a measure to

profitibility(Y Pan,S Li, D K Tse 1999, P. Juan Garcia Teruel 2007, S B Naceur 2003, R Hallowell

1996).This ratio indicates how profitable a company is relative to its total assets. The return on assets

(ROA) ratio illustrates how well management is employing the company's total assets to make a

profit. The higher the return, the more efficient management is in utilizing its asset base.

(iii) Parent firm- location unfamilarity

Previous studies argue that the greater the perceived distance between the home and host country in

terms of culture, economic systems, and business practices, the more likely it is that MNCs will shy

away from direct investment in favour of licensing or joint venture agreements [Anderson and

Coughlan 1987; Davidson 1980; Green and Cunningham 1975; Johanson and Vahlne 1977; Kobrin

1983; Stopford and Wells 1972]. This is because the latter institutional modes enhance MNCs'

flexibility to with draw from the host market should they be un able to comfortably acclimatize

themselves to the unfamiliar setting. Restated, other things being equal, when the perceived distance

between the home and host country is great, MNCs will favor entry modes that involve relatively low

resource commitment. Therefore location is considered as an important factor influencing the entry

mode selection. Researchers of entry mode have identified distribution and selling expenditure as a

measure for location risk (Shane 1996, Jaya Pradhan....).Consistent with the literature reveiw current

study explains distribution and selling expenditure as a measure for location unfamilarity.

Country Specific Factors

(i) State influence of host country

State influence is measured in terms of the extent to which local regulative forces influence foreign

firms' activities in a host country. In this study, we measured this variable taking dummy variable for

U.S.A ANDA registration fee 2008 and European Union policy change 2006. These items include

state interference (the extent to which state interference hinders the development of business); state

control (the extent to which state control the entry and performance of enterprises distorts );

investment restriction (the extent to which investment in the economy is directed by the local

government);bureaucracy (the extent to which bureaucracy hinders business development);

protectionism (the extent to which national protectionism prevents foreign products and services

being imported);and ownership restrictions (the extent to which foreign firms have difficulties in

acquiring control in a domestic environment).

(ii) State influence of home country

State influence is measured in terms of the extent to which local regulative forces influence foreign

firms' activities in a home country. In this study, we measured this variable taking dummy variable for

Indian Patent Regime 2005. After the new Indian Patent Regime the research and development

capacity of Indian pharmaceutical manufacturers has been on the rise. The results indicate that the

larger companies have initiated activities to increase investment in research and development (R&D)

and applications for process and product patents. On the other hand, efforts in small or medium scale

units have been directed at improving the quality of production to meet the international standards and

competition in the generic sector as well as to improve the export prospects. Indian companies can


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also exploit the lower cost of drug discovery R&D in India to their advantage and invite foreign

companies for collaborative research. Added to that, the incentive India offers to MNC‘s in terms of

cost-effective, skilled R&D manpower and facilities for clinical research, might lead to several global

companies shifting their R&D activities to India or out sourcing manufacturing and research activities

to India. In this scenario, the pharmaceutical MNC‘s are geared for mergers and acquisitions to create

large corporate structures to tackle skill requirements and to use already existing market network and

established brand equity. This will lead to economic development and rapid increase in the

technological capabilities of Indian firms. Patent has assumed great importance in recent times since

its basic function-to promote innovation-is an essential component of economic growth and social

evolution. Patent is not just an incentive to invest in the innovation process per se, but is also

increasingly important for trade and industry worldwide. For developing countries like India, patent is

an essential component of the framework to attract foreign investment and faster technology transfer.

For the purpose of capturing appropriate impact of Patent Regime 2005 on Indian pharmaceutical

industry lag period of 3years have been taken. These items include state interference (the extent to

which state interference influence the development of business); state control (the extent to which

state control the entry and performance of enterprises ); investment restriction (the extent to which

investment in the economy is directed by the local government);and bureaucracy (the extent to which

bureaucracy hinders business development).

4.2 Empirical Model

The empirical model for this study has been specified based on the theoretical model which states that

a firm normally starts exporting to a country via an agent, later establishes a sales subsidiary, and

eventually, begins to produce in the host country. It is empirically proved that the bigger the psychic

distance between the home and the host country the longer take the relative steps of the process

(Johanson & Wiedersheim-Paul, 1975). In this context, the psychic distance is the sum of factors

preventing the information flow from and to the market. Such factors could be differences in language,

in culture, in business practices and many other firm specific and country specific factors. Based on

this model, export intensity of the firm is considered as the initial stage and a non-equity mode of entry

in this study.

Literature for entry modes and the factors influencing it suggests that the factors influencing the entry

modes can be classified as firm specific, country specific, industry specific and product specific. Based

on the objective and the limited availability of data, only firm specific and country specific factors are

considered for this study. Data on these factors for the selected firm have both space as well as time

dimensions. The dependent variable selected for the analysis representing the entry mode are of binary

nature, hence the most appropriate logistic regression model has been applied. As the data fulfils the

criteria of a panel data and consequently analytical techniques of a panel data were applied to achieve

the objective of the study. However as the selection of the firms for this study resulted in firms having

almost similar characteristics within each of the three categories of firms, the groups or entities were

relatively homogenous, hence pooled logistic regression has been used. No distinction was made

between cross-section and time series, neglecting the heterogeneity across the firms and assuming the

same coefficients for all the firms. Further, the choice between the pooled logistic regression and

random effects estimation of panel logistic regression is based on the fact that the pooled regression is

appropriate if the model does not yields large standard errors (small T-Stats) which is an indication

that the groups lack heterogeneity.


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Econometric Model

The model estimated for this study usesexport intensity as a representative of the entry mode of the

firm.The model is estimated with the three categories of firms selected for this study – all the selected

firms in the sample, firms with foreign equity and firms without foreign equity. Following logistic

regression model has been estimated. Here binary variable for export intensity has been taken as the

dependent variable. Firms having export intensity greater than 25% takes a value of 1 and 0 otherwise.

P = Probability (Y=1| X1 = x1, X2 = x2 ......) = ln [π/ (1−π)]

= β1i + β2X1it + β3X2it + β4X3it + β5X4it + β6X5it + β7X6it + β8X7it + β9X8it + β10X9it + uit

(1)

Where,Yit is the dependent variable (export_intensity)of the firm ‗i‘ in the year ‗t‘representing the

entry mode of the firm. X1 is profitability of a firm (income_ sales), X2 is age of the firm (age), X3 is

R & D expenditure to sales ratio (rnd), X4 is selling and distribution expenditure to sales ratio (dist),

X5 is capacity utilization (cap_utilization), X6 is size of the firm (size), X7 is GDP growth rate of

USA (us_gdp), X8 is the dichotomous variable for patent regime (patent), X9 is the dichotomous

variable for the year of US licensing fee hike (licensing_fee) and uit is cross section error component.

β1i represent the common mean value of the intercept and β2-9 are the parameters associated with the

regressors.

Pooled logistic regression has been used for the estimation of Eq. 1. Both fixed effects (FE) and

random effects (RE) models of panel logit were estimated with hausman suggesting random effect.

Further, pooled logistic regression was also estimated to make a choice between pooled and random

effect panel logit. The decision on pooling the data for the logistic regression is based on smaller

standard errors (large T-Stats) achieved on estimating the pooled logistic regression indicating that the

groups lack heterogeneity.

4.2 Data and variables description

Firm level data for the selected variables has been extracted from CMIE Database accessed through

Prowess 4.1. Data of the macro-economic indicators pertinent to the host country have been taken

from the World Bank database. Time period from 2002-2013 has been selected for this study. The

period coincides with the period when the Indian ODI (Outward Direct Investment) in the

Pharmaceutical increased from US$ 4.8 million in 2001 to a staggering US$ 1956 million in 2012.

Export intensity (export_intensity) has been taken as a dependent variable. It has been taken as a

representative of the entry mode of the firm. This represents the first and foremost step of the firms‘

effort to internationalize. Export intensity of the firms in our sample has been calculated as the

percentage of total exports in total sales of the firm in a given year. If the firm had export intensity

greater than 25% in a given year it was assigned a value of 1 and 0 if less than that. In our sample, in

2001 there were around 21 companies who were exporting more than 25% of their sales. While this

figure jumped to 42 firms in 2005 and further to 52 companies in 2010. This indicates with passage of

time the export intensity of Indian pharmaceutical firms is increasing.

The independent variables include both firm specific and country specific variables. Profitability

(lincome_sales) of the firm has been measured as the ratio of profit after tax and total sales of the firm

in a given year. Age of the firm represents the experience which firm gained over the period of time.


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Capacities generated and capabilities gained over a period of time enable firm with the decision

making power enabling it to take appropriate investment decision and compete in the market

effectively. Age of the firm (age) calculated since the incorporation of firm has been used. Research

&Development intensity (rnd) calculated as the ratio of expenditures by a firm on research and

development to the firm's sales has been used as a measure of company R&D spending in knowledge

and technology. Diversified product portfolio along with marketing skills enhances firm‘s

competitiveness in global and domestic markets. This has been captured using marketing intensity

(mrktng_intensity) calculated as the ratio of total expenditure by a firm on advertising, selling and

distribution to the total sales of the firm in a given year. Capacity utilization (lcap_utilization)

representing the operational efficiency of the firm has been calculated as total sales to total assets.

Size of the firm (size) used in equation 1 is the sum of three-year average of the total income and total

assets of a company.

Country specific variables include market size of host country (usa_gdp) represented by the host

country, USA‘s GDP growth rate. Patent Regime 2005 (patent) has been used to represent the

regulatory environment of the home country. It is a time dummy variable representing the patent

regime in India. It takes on the value of 1 after 2005, the year in which the new patent regime was

started in India and 0 for the years before that.Approval fee of USA (licensing_fee) has been used to

represent the regulatory environment of the host country. It is a dummy variable representing the hike

in licensing fee in US representing the host country policy. It takes on the value of 1 after 2008, the

year in which it was hiked and 0 for the years before that.

5. RESULT AND DISCUSSION

Factors affecting the choice of entry mode of firm in pharmaceutical industry have been determined

using logit model. Table 1 presents the summary statistics of the variables used in the analysis.

Correlation matrix or the measure of the correlation among different variables used in the study is

presented in Table 2. It is found out that most of the variables are uncorrelated, except gdp growth

rate USA (us_gdp) and Europe (eu_gdp). These two variables are found to be highly correlated with

correlation coefficient of 0.8073, hence eu_gdp has been dropped in the final analysis. As US is

considered to be the main market for Indian pharmaceutical industry, us_gdp representing the market

size of the host country has been retained in the model.

Result of the logistic regression is presented in Table 3. The results shows probability of the firms

having export intensity greater than 25% is negatively and significantly affected by profitability at lag

of 1 year, age of the firm and capacity utilization. Growth rate of GDP of USA and licensing fee

representing the host country market size and regulatory policy have significant and negative effect.

The domestic policy represented by the binary variable for the change in patent regime in India does

not have any significant impact on increase in export intensity of the selected firms. Most importantly

R&D intensity does not have any significant impact. Both marketing intensity and size of the firm

positively influence the decision.

Marginal effects show that a unit increase in profitability (income_sales) results in decrease in

probability of the firm having export intensity greater than 25% or the decision to adopt the first stage

of entry by 4.5% keeping effect of all other variables at means. Financial efficiency of a firm

significantly influences the selection of entry mode in international market. Referring to the stage

model as resource commitment increases, the firm climbs up the ladder of entry modes from non

equity modes to equity modes. Hence with increase in financial efficiency its export intensity would


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decrease, and probability of selection of other equity entry modes increases. Age of a firm has a very

small impact. Probability of the firm entering through the first stage decreases by less than 1% for

every one year increase in age of the firm. As the age of the firm increases, its experience increases

which further leads to more knowledge and commitment of the firm. This knowledge and

commitment gives the confidence to the firm to move towards more of equity modes of entry leaving

back the non equity modes (exports). Henceforth as the firm turns older and more experienced it will

start moving towards adoption of equity modes of entry resulting in the negative relationship between

export intensity and the age of the internationalizing firm. Operational efficiency (lcap_utilization)

motivates the firm to expand. Results show that a unit increase in operational efficiency results in

20% decrease in the probability of the firm entering through the first stage. This again confirms the

theory of stage model. The better off firms are more likely to go for equity mode of entry compared to

the non-equity mode.

Size of the firm (size) and marketing intensity (mrktng_intensity) favours entry through first stage.

Probability increases by 5.7% and 3% respectively. This indicates that firms which are in the process

of increasing its size and diversifying its product portfolio along with marketing skills choose the first

stage of entry. Increase in size and diversification enables them to enhance their competitiveness in

global and domestic markets.Host country regulatory framework (licensing_fee) shows an inverse

relationship. It comes out to be one of the most important factors that favours equity mode over the

non-equity mode. With the hike in licensing fee in US in 2008, probability of the firm entering

through the first stage decreased by 39.52%. As the FDA (USA) increases the approval fees for the

exports, the process becomes more complicated and tedious. Henceforth the motivation of firms to

enter the foreign market shifts from exports to other equity modes of entry. The market size of the

host country (us_gdp) is also very crucial in deciding the choice of entry through first stage. The

probability decreases by 8%. Market size is important not only for sale of the products but also

provides bigger markets and efficient utilization of the resources and exploitation of economies of

scale (Chakrabarti, 2001). Increase in market size of the host country provides better incentive and

favours firms‘ decision to go for equity modes of entry.

The most interesting findings of the analysis is that both R&D intensity (rnd) and regulatory

environment of home country, Patent Regime 2005 (patent) had no significant effect on the

probability of the firm having export intensity greater than 25% or entry through the first stage.Post

2005, after the amendment of process patents to product patents resulted in many foreign innovator

pharmaceutical industry to be located in the Indian market.Subsequently Indian pharmaceutical

companies were able to portray themselves as the dominating players of generic drugs market

(Thakur, 2012). The introduction of product patent regime highly influenced the exports intensity of

the Indian pharmaceutical firms. There is a negative relationship between the export intensity and the

patent regime 2005. Growth in Indian generic drug market and apprehension about the loss of revenue

due to patent expiry many India and foreign companies have come up with change in entry modes

from exports to other equity entry modes.

6. CONCLUSION

The study made an effort to empirically determine the factors that influence the firm‘s decision to

enter foreign market through the non-equity mode of exports considered as the first stage of entry in

accordance with the stage model. Findings of the analysis suggest that in the Indian pharmaceutical

sector, firms prefer to entire foreign market more through equity mode of entry as compared to the

non-equity mode. The probability to enter through the first stage represented here by the firm with


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export intensity greater than 25% decreases with increase in profitability, age, capacity utilization,

host country market size and regulatory measures. It is positively influenced by size of the firm and

their marketing intensity. This indicates that as Indian pharmaceutical firms grow and diversify it

takes up the first stage of entering the foreign market whereas the other determinants favours the other

equity mode of entry. This confirms that Indian pharmaceutical firms follows the stage model and

enters through export but does not remain restricted to export only rather they are keener on taking up

the other equity mode of entry and ensure their foreign presence. This therefore calls for a clear

understanding of the determinant that favours equity mode of entry for better policy implications.

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48. URL:http://www.cipla.com

49. URL:http://www.ibef.org

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http://www.cipla.com/

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http;/www.indiastats.com

http://www.raymonds.com/

http://www.rbi.org.in/

TABLES

Table 1 Summary statistics of the variable used in the analysis.

Variable Obs Mean Std. Dev. Min Max

exp_more 1297 0.306091 0.461046 0 1

income_sales 1175 0.084698 0.509549 -4.67054 15.59387

age_1 1300 29.20462 18.26909 0 89

rnd1 950 2.422679 2.852321 0.00496 17.78458

mrktng_intensity 1036 2.062688 1.656165 0.009859 13.09524

cap_utilizationn 1175 0.901984 0.405586 0.03203 3.874346

size 1090 7323.141 11598.86 106 128356.9

usa_gdp 1300 1.749985 1.646162 -2.80362 3.787531

euu_gdp 1300 1.205474 1.943589 -4.41417 3.422663

patent 1300 0.615385 0.486692 0 1

licensingfee 1300 0.461539 0.49871 0 1

lincome_sales 1051 -2.50054 0.922229 -7.85205 2.746878

lcap_utilization 1175 -0.21623 0.515467 -3.44108 1.354377

lsize 1090 8.199496 1.172643 4.663439 11.76257


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Table 2 Correlation matrix of the variables used in the analysis

exp_mor

e

income

~s

age_1 rnd1 distr cap_ut~

n

size usa_gd

p

euu_gd

p

patent licens~

e

exp_more 1

income_sales -0.0254 1

age_1 -0.3215 0.0907 1

rnd1 0.1517 0.0501 -

0.1715

1

mrktng_intensit

y

0.0425 0.0394 0.1497 -

0.0721

1

cap_utiliz~n -0.2338 -0.0749 0.1986 -

0.3429

0.0775 1

size -0.0305 0.2275 0.1792 0.4936 -

0.0376

-0.3195 1

usa_gdp -0.0685 -0.0009 -

0.0402

-

0.0795

0.034 0.1476 -

0.0674

1

euu_gdp 0.0504 0.0279 -

0.0533

-

0.0839

0.0125 0.1432 -

0.1483

0.8102 1

patent -0.0703 0.0345 0.1044 0.2019 -

0.0291

-0.2871 0.268 -0.478 -0.2469 1

licensingfee -0.1599 0.0319 0.1226 0.1838 -0.013 -0.2852 0.3259 -0.532 -0.5945 0.692

4

1


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Table 3 Factors affecting Export as first stage of Entry – Logistic Regression

Export intensity- exports

to sales ratio >25%

(exp_more)

Coef. Odd Ratio Marginal Effects Std. Err.

L1. Profitability

(lincome_ sales)

-0.2171*** 1.24 -0.0453 0.1157

Age (age) -0.0416* 0.96 -0.0086 0.0060

Research &Development

intensity

(rnd)

0.0480 1.05 0.0100 0.0384

Selling &Distribution

intensity

(mrktng_intensity)

0.1467** 1.16 0.0306 0.0598

capacity utilization

(lcap_utilization)

-0.9583* 0.38 -0.2000 0.2383

size of the firm (lsize) 0.2736** 1.31 0.0571 0.1265

Market size of host

country –GDP growth of

USA (usa_gdp)

-0.3845* 0.68 -0.0802 0.0658

Regulatory framework

of home country - Patent

Regime 2005 (patent)

-0.09 0.92 -0.0186 0.2611

Regulatory framework

of host country -

approval fee

(licensing_fee)

-1.9718* 0.14 -0.3952 0.2947

_cons -1.21 0.3 1.0930

Number of obs 702

LR chi2 108.67

Prob > chi2 0.0000

‘*”, ‘**’, ‘***’ denotes 1%, 5% and 10% level of significance respectively


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