Common Ownership and Innovation Efficiency
57 Pages Posted: 27 Nov 2019 Last revised: 2 Oct 2021
Date Written: October 1, 2021
How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common ownership leads VCs to shut down lagging drug projects, withhold funding from lagging startups, and redirect those startups' innovation. These results support theories dating back to Loury (1979): By coordinating R&D efforts across competing firms, a common owner can reduce duplication of R&D. Consistent with common ownership improving innovation efficiency, common ownership rates are positively correlated with the ratio of R&D output to funding. Though we highlight gains in innovation efficiency, common VC ownership can also impose social costs.
Keywords: venture capital, common ownership, competition, healthcare
JEL Classification: G24, L41, L10
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