Search-and-Match in a Rush: Investigating Reactive Licensing in the Pharmaceutical Industry
51 Pages Posted: 22 May 2018
Date Written: April 18, 2018
Large innovative firms routinely strengthen their new product pipelines by licensing developing technologies from other (typically startup) companies. Licensing is generally portrayed as a carefully planned and executed, "proactive" activity, used to implement the large firm's innovative strategy. We argue that these firms also use licensing in a different -"reactive"- way, when they seek to quickly fill the gap left by development setbacks of other products in their pipelines. In reactive circumstances, firms favor speedier dealmaking in detriment of time searching for candidate technologies that are compatible with the their capabilities. This haste hurts the "matching quality" of licensed technologies and, in turn, their post-licensing development performance. We study the problem in the context of the pharmaceutical industry, where this behavior can be rationalized by executive compensation tied to the firm's stock market returns. Exploiting quasi-experimental variation from clinical trial outcomes, we show that reactive licensing: (i) does occur, (ii) deteriorates matching quality, and (iii) creates significant productivity costs for firms that engage in it.
Keywords: Innovation, Licensing, Pharmaceuticals, Search, Technology
JEL Classification: L2, L6, M3, O3
Suggested Citation: Suggested Citation