Well Begun Is Half Done: Initial R&D Competence and Firm Growth
60 Pages Posted: 31 Oct 2015
Date Written: May 23, 2018
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, suggesting initial conditions largely determine cross-sectional variations of R&D successes. We find that firms with high initial competence are exploitative in their best segment and exit through an IPO earlier. By contrast, firms with low initial competence become explorative, diversifying into multiple segments. Medicare Part-D legislation as an exogenous shock to diversification incentives suggests a causal relationship. We furthermore quantify the effects of firm skill versus luck based on our results.
Keywords: Firm Initial Conditions, R&D Competence, Innovation, Diversification, Firm Growth
JEL Classification: G32, G34, O32
Suggested Citation: Suggested Citation