Volume 29, Issue 4, 2020
DOI: 10.24205/03276716.2020.806
Analyzing Total Factor Productivity of Biotech Firms in the light of FDI Activities in Taiwan: An Application of Hyperbolic Distance Function
Abstract
Conventional Malmquist total factor productivity (TFP) index assumes all decisionmaking units (DMUs) operating at the optimal scale, while the actual technology employed may not be at constant returns to scale (CRS). In addition, based on variable returns to scale (VRS) the Malmquist TFP index may encounter the problem of infeasibility and. Furthermore, it can only consider either the output expansion or input contraction, but not both. This study
employs the hyperbolic distance function, simultaneously expanding outputs and contracting
inputs proportionally, to decompose the TFP index of biotechnology firms, which helps
overcome the problem of infeasibility. Using data from Taiwan Economic Journal consists of
58 biotechnology firms from 2008 to 2014, empirical results show that the biotechnology
firms’ TFP has increased over time, mainly due to technological progress and scale efficiency improvement, while technical efficiency change has not been a crucial factor. In addition, 16%
of observations face the problem of infeasibility after employing the output distance function
to construct the Malmquist TFP index under VRS. We also investigate whether foreign direct
investment (FDI) activities influence TFP of Taiwan’s biotechnology firms and find that firms
with FDI exhibit larger technological change than those without FDI, while the opposite is true
for the scale efficiency. We conclude that FDI activities could upgrade the technology of Taiwan’s biotechnology firms. We discuss the policy implications of the findings.
Keywords
Biotechnology firms; hyperbolic distance function; total factor productivity; variable returns to scale