# R&D investment and total factor productivity in China’s pharmaceutical industry: The moderating effect of the centralized procurement policy

## TL;DR

This paper studies how China's centralized procurement policy affects pharmaceutical R&D investment and productivity.

## Contribution

It reveals how the policy shortens the delayed impact of R&D on productivity and varies by company financing constraints.

## Key findings

- The centralized procurement policy reduces the lagged effect of R&D investment on total factor productivity.
- Firms with financing constraints increase R&D investment more under the policy.
- The policy strengthens the link between R&D and productivity, especially for financially constrained firms.

## Abstract

We use the implementation of China’s centralized procurement policy as a quasi-natural experiment to examine the effects of China’s centralized procurement policy on pharmaceutical research and development (R&D) investment and total factor productivity (TFP). Empirical findings demonstrate that the positive impact of R&D investment on TFP has a delayed effect in the pharmaceutical sector. The centralized procurement policy shortens this lagged effect by imposing survival pressure and pushing companies to enhance their R&D investment intensity significantly. From the heterogeneity perspective, for companies facing significant financing constraints, the centralized procurement policy significantly enhances the intensity of R&D investment. In contrast, for companies with weaker finance limitations, the impact of the policy on their R&D investment intensity is insignificant. Still, the positive moderating effect of the policy on the relationship between R&D investment and TFP is more pronounced. Based on the findings, policymakers need to take a long-term view and consider the diversified influence of different enterprises. Policies that reduce financing constraints and create an enabling environment for sustained R&D are important and complementary.