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Well Begun Is Half Done: Initial R&D Competence and Firm Growth

63 Pages Posted: 31 Oct 2015 Last revised: 30 Nov 2017

Kyungran Lee

The University of Hong Kong - School of Business

S. Katie Moon

University of Colorado at Boulder - Leeds School of Business

Seungjoon Oh

Peking University - HSBC Business School

Date Written: November 29, 2017

Abstract

We examine the effects of initial R&D competence on innovation strategies and firm growth. Using project-level drug development data for entrepreneurial pharmaceutical firms, we show that R&D performance persists over long periods, suggesting initial conditions largely determine the cross-sectional variation in R&D successes. We find that firms with high initial competence are exploitative in their best segment and exit through an IPO earlier or receive greater amounts of venture capital funding. By contrast, firms with low initial competence are explorative, diversifying into multiple segments. Medicare Part D legislation as an exogenous shock to diversification incentives suggests a likely causal relationship. Our results are consistent with firm initial skills (versus luck) leading to different innovation strategies and growth.

Keywords: Firm Initial Conditions, R&D Competence, Innovation, Diversification, Firm Growth

JEL Classification: G32, G34, O32

Suggested Citation

Lee, Kyungran and Moon, S. Katie and Oh, Seungjoon, Well Begun Is Half Done: Initial R&D Competence and Firm Growth (November 29, 2017). Available at SSRN: https://ssrn.com/abstract=2684482 or http://dx.doi.org/10.2139/ssrn.2684482

Kyungran Lee

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Katie Moon (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Seungjoon Oh

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

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