Trials and Terminations: Learning from Competitors’ R&D Failures

I analyze project continuation decisions where firms may resolve uncertainty through news about competitors’ research and development (R&D) failures, as well as through their own results. I examine the tradeoffs and interactions between product-market competition and technological learning from...

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Bibliographic Details
Published in:Management science 2021-09, Vol.67 (9), p.5525-5548
Main Author: Krieger, Joshua L.
Format: Article
Language:English
Subjects:
Competition
Competitors
Contests
Development programs
Discontinued
industrial organization: market structure, firm strategy, and market performance
industries: pharmaceutical
Learning
News
organizational studies: decision making
R&D
Research & development
research and development: innovation
research and development: project selection
Technology
Uncertainty
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Description
Summary:I analyze project continuation decisions where firms may resolve uncertainty through news about competitors’ research and development (R&D) failures, as well as through their own results. I examine the tradeoffs and interactions between product-market competition and technological learning from parallel R&D projects. Leveraging the biopharmaceutical industry’s unique characteristics to overcome barriers to measuring project-level responses, I use a difference-in-differences strategy to evaluate how competitor exit news alters a firm’s own project discontinuation decisions. The findings reveal that technological learning dominates competition effects. Firms are most sensitive to competitor failure news from within the same market and same technology area—more than doubling their propensity to terminate drug development projects in the wake of this type of information. Finally, I explore how levels of competition, uncertainty, and opportunities to learn moderate the response to competitor failure news. This paper was accepted by Joshua Gans, business strategy.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2020.3775