Cost Efficiency Analysis of Taiwan Biotech and Pharmaceutical Industry: The Application of Stochastic Meta Frontier Model

  •  Chen-Ming Chen    
  •  Tzu-Chun Sheng    
  •  Yung-Lieh Yang    


After the 1980s, Taiwan government has prepared a plan to promote strategies and accelerate the biotechnology development for Taiwan’s biotech and pharmaceutical industry. Biotech and pharmaceutical industry technology intensity have a significant connection with the research and development activities and firm performance. Based on the two-step stochastic meta frontier model developed by Huang, Huang and Liu (2012), this study establishes translog cost function. The purpose of the study is to estimate the performance of cost efficiency for firms in the Taiwan biotech and pharmaceutical industry, and to analyze group-specific and firm-specific environmental variables. The empirical results show that it is basically a 15.87% cost inefficiency for the average cost efficiency of Taiwan biotech and pharmaceutical industry. Firms’ operating scale and industrial environment development are supported by the government to encourage cost efficiency. Considering the differences between sub-industries, the empirical results indicate that the R&D activity promotes the growth of cost efficiency in both pharmaceutical and medical equipment industry. For the relation of agency issues and cost efficiency, Convergence-of-Interest Hypothesis exists in the pharmaceutical industry, and Conflict-of-Interest Hypothesis exists in the medical equipment industry.

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