Market Structure, Government Shareholding and Cost Efficiency in Taiwan’s Biotech Industry

Abstract

Based on the two-step stochastic Meta frontier model developed by Huang et al. (2011), this study establishes translog cost functions. Our purpose is to estimate the performance of firms in terms of cost efficiency in Taiwan’s biotech and pharmaceutical industry, and to analyze group-specific and firm-specific environmental variables. The empirical results show that the value of the Meta frontier cost efficiency (MCE) indicator of the industry is 0.7241, indicating that it is basically 27.59% cost inefficient. The value of MCE in the pharmaceutical industry (0.7496) is higher than that in the medical equipment industry (0.7002). The empirical results also show that the cost efficiency of Taiwan’s biotech firms can positively benefit from the government’s contributions. In considering the differences between sub-industries, R&D activities are found to promote the growth of cost efficiency in both the pharmaceutical industry and medical equipment industry. As for the relationship between agency issues and cost efficiency, support is found for the Convergence-of-Interest Hypothesis in the pharmaceutical industry.