P3-9: Modelling Spatial Patterns and Network Effects in Efficiency Frontiers of Innovative Activity in Health Care

PhD Student: Rouven Haschka
Supervisor: Prof. Dr. Helmut Herwartz
Group: Econometrics

Project Description:
Pharmaceutical research is costly and the number of new drugs licensed by authorities is small (Cressey, 2001 and Munos, 2009). As a consequence, the pharmaceutical industry has to continuously reconsider the drug development process to ensure an ongoing, rewarding innovation process and sustainable use of resources where the research facilities work efficiently. Since external and internal research act as complements (Beise, 1999), a strong connection between academia and industry could help to reduce inefficiencies in the drug development process. Relevant and interacting scaling dimensions include spatial dependencies and networks between public and private sector research. In particular, the presence of networks may require to integrate interactions across distinct scales.
Anselin et al. (1997) show that university research has both direct and indirect effects on innovation activity especially on Research and Development (R&D) spending of firms. The authors analyse spatial spillover effects between university research and firm innovation activity in the US at both the state and the metropolitan area level. In a further analysis, Anselin et al. (2000) do not find evidence for spillover effects in the Drugs and Chemicals sector. Acemoglu and Linn (2004) investigate the market size as a determinant of drug innovation in the US. They identify a significantly positive effect of potential market size on the entry of new compounds and patented drugs. However, the authors did not find evidence for spillover effects of public funded research on medical innovations. Nevertheless, Toole (2007, 2012) uses data from the US to show that not only market size matters in the development of new drugs, but also public funded research thereby underlining the prevalence of spillover effects between firm and public funded innovation activity.
The analysis of technical efficiency in the pharmaceutical sector is a recent development in the literature of efficiency analysis. Bezi? et al. (2013) analyse the efficiency of the pharmaceutical industry by means of Data Envelopment Analysis (DEA) for a cross section of European countries. They emphasise the effect of R&D activity on export competitiveness. Saranga and Banker (2009) and Suyanto and Salim (2013) analyse the efficiency in the Indian and Indonesian pharmaceutical industry, respectively. Even though the latter take into account spillover effects between domestic and foreign firms, interactions and spatial dependencies are mostly not considered in analysing efficiencies in the pharmaceutical sector. Firms engaged in innovation activity could benefit from research undertaken by competitors in the pharmaceutical sector (Cressey, 2001). Furthermore, Danzon et al. (2005) show that drugs developed within an alliance of pharmaceutical firms are more likely to be successful. Moreover, the decision to investigate a specific new component depends heavily on available information, including the experience made by competitors. The spread of information along the information chain can be modelled by means of networks. As a consequence, an efficiency analysis of innovative activity in the pharmaceutical sector should include both knowledge spillover and network effects.
We consider innovation activity in the pharmaceutical sector in Europe in the framework of a Stochastic Frontier Analysis (SFA) which takes into account the spatial dependence as well as interactions between the public and the private sector of the research process. For this purpose, multi-tier network effects will be included to model learning processes and the dissemination of information. We will further develop the spatially augmented SFA models as in Herwartz and Strumann (2012, 2013) and refer to state of the art methods to reveal potentials and inefficiencies of the health care innovation process under networking and dependence in space.

Additional references:
Acemoglu, D., and Linn, J. (2004). Market size in innovation: Theory and evidence from the pharmaceutical industry. The Quarterly Journal of Economics, 119(3), 1049-1090.
Anselin, L. , Varga, A., and Acs, Z. (1997). Local geographic spillovers between university research and high technology innovations. Journal of Urban Economics, 42(3), 422-448.
Anselin, L. , Varga, A., and Acs, Z. (2000). Geographical spillovers and university research: A spatial econometric perspective. Growth and Change, 31(4), 501-515.
Beise, M., and Stahl, H. (1999). Public research and industrial innovations in Germany. Research policy, 28(4), 397-422.
Bezi?, H., Galovi?, T., and Mi?evi?, P. (2013). R&D efficiency for pharmaceutical companies in the EU. International Journal of Economics and Statistics, 1(4), 209-215.
Cressey, D. (2001). Traditional drugs - discovery model ripe for reform. Nature, 471(7336), pp. 17-18.
Danzon, P., Nicholson, S., and Pereira, N. (2005). Productivity in pharmaceutical?biotechnology R&D: The role of experience and alliances. Journal of Health Economics, 24(2), 317-339.
Herwartz, H., and Strumann, C. (2012). On the effect of prospective payment on local hospital competition in Germany. Health Care Management Science, 15 (1), 48-62.
Herwartz, H., and Strumann, C. (2013). Hospital efficiency under prospective reimbursement schemes: An empirical assessment for the case of Germany. The European Journal of Health Economics. Advance online publication. doi: 10.1007/s10198-013-0464-5
Munos, B. (2009). Lessons from 60 years of pharmaceutical innovation. Nature Reviews Drug Discovery, 8, pp. 959-968.
Saranga, H., and Banker, R. (2009). Productivity and technical changes in the Indian pharmaceutical industry. Journal of the Operational Research Society 61(12), 1777-1788.
Suyantoa, and Salim, R. (2013). Foreign direct investment spillovers and technical efficiency in the Indonesian pharmaceutical sector: Firm level evidence. Applied Economics, 45(3), 383-395.
Toole, A. (2007). Does public scientific research complement private investment in research and development in the pharmaceutical industry?. Journal of Law and Economics, 50(1), 81-104.
Toole, A. (2012). The impact of public basic research on industrial innovation: Evidence from the pharmaceutical industry. Research Policy, 41(1), 1-12.