Well Begun Is Half Done: Initial R&D Competence and Firm Growth
63 Pages Posted: 31 Oct 2015 Last revised: 30 Nov 2017
Date Written: November 29, 2017
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: Suggested Citation