# Will centralized drug procurement policy improve enterprises’ total factor productivity?

## TL;DR

This study finds that China's centralized drug procurement policy reduces pharmaceutical companies' productivity, especially for non-state-owned firms.

## Contribution

The paper identifies two novel mechanisms linking the policy to reduced productivity: tighter financing and R&D-driven resource inefficiency.

## Key findings

- NCDP participation significantly lowers Total Factor Productivity in pharmaceutical firms.
- Non-state-owned and non-TCM firms experience stronger negative effects from the policy.
- R&D investment surges under NCDP lead to resource crowding-out and investment inefficiency.

## Abstract

Against the backdrop of China’s healthcare reform challenges in drug pricing, this study investigates the impact of the National Centralized Drug Procurement (NCDP) policy implemented in 2018. Employing Difference-in-Differences (DID) methodology on quarterly data from A-share listed pharmaceutical firms (2003-2021, sourced from WIND/CSMAR databases), we demonstrate that NCDP participation significantly reduces Total Factor Productivity . Robustness is confirmed through index substitution, propensity score matching, and lag tests. The negative effect is amplified in non-state-owned enterprises, non-TCM manufacturers, and firms with high analyst coverage. Mechanistically, NCDP suppresses TFP through: (i) tightened financing constraints (↑KZ index) impairing capital allocation efficiency, and (ii) an indirect pathway where short-term R&D surges (↑RD) trigger resource crowding-out effects, compounded by diminished investment efficiency (↑INV), ultimately forming an “R&D→investment inefficiency→TFP↓” transmission chain. To reconcile public welfare objectives with corporate sustainability, we propose dual optimization strategies: differentiated financing support and innovation incentive reform. These establish a sustainable equilibrium between price control and TFP enhancement, providing actionable solutions for nationwide NCDP scaling.