A Story of Breakthrough vs. Incremental Innovation: Corporate Entrepreneurship in the Global Pharmaceutical Industry

Abstract

Breakthrough innovations are difficult to create; yet they are critical to long term competitive advantage. This highlights the considerable opportunities and risks that face corporate entrepreneurs. We study the complex explorative and exploitative entrepreneurial processes of multinational firms operating in the global pharmaceutical industry. We analyze over 1,500 new drug approvals by the U.S. Food and Drug Administration (FDA). We find that a successful track record in breakthrough innovation significantly increases the likelihood of a current breakthrough, while achievements in non-generic incremental innovation do not have a significant effect. A strong foundation in generic incremental innovation hinders breakthrough performance. Thus, incremental innovation processes appear to be heterogeneous. Products that emerge from joint ventures and alliances are more likely to be breakthroughs. Foreign subsidiary participation in innovation processes did not significantly inhibit breakthroughs. These suggestive findings support the decentralization literature that highlights the benefits associated with exploiting knowledge from foreign centers of excellence. Contrary to the literature arguing that younger firms tend to have greater advantages in “exploration”, we do not find firm age to be a significant predictor of the likelihood of breakthrough innovation.

Keywords: corporate entrepreneurship, intrapreneurship, breakthrough innovation, incremental innovation, organizational ambidexterity, open innovation, foreign subsidiaries, strategic alliances, global pharmaceutical industry

JEL Classification: O33, O32, F2