Biomedical Engineering Reference
In-Depth Information
expected benefi ts from such partnerships. But if complementarity based on co-
specialized assets prevails in the industry, the ensuing division of labor should have
already eradicated the need of large pharmaceutical fi rms to invest in in-house
R&D. After all, they could source numerous new projects from symbiotic relation-
ships with research-focused fi rms (e.g., biotech ones). Yet, no such development has
materialized. Private fi rms recognize the importance of investing in R&D bases of
their own so that they can build and maintain the skills, the knowledge, and the
organizational routines to identify and utilize the research output of others (Cockburn
and Henderson
1998
). Investing in leading edge research to stay current with the
advancements of open science would also enhance the fi rms'
absorptive capacity
(Cohen and Levintal
1989
,
1990
).
Firms that underestimate the importance of conducting internal R&D would not
only curtail their own capability to originate novel drugs but may also relinquish
their ability to benefi t from the innovations of others. The theoretical and practical
knowledge contained in open science can be adopted more quickly and more easily
by fi rms which have the capacity to internalize it, while adjusting it to their own
needs and goals. Virtually no fi rm in this high-paced industry can afford to sit on the
sidelines regarding R&D activities—if it did, it would essentially disqualify itself
from the race to market. Therefore, investment in own R&D keeps pharmaceutical
fi rms at the forefront of technological advancements and facilitates the assimilation
of know-how obtained through partnerships.
Even the largest pharmaceutical fi rms have limited fi nancial, technological,
organizational, managerial, production, and commercialization capacities. To part-
ner up with other ventures, they need internally cultivated screening capabilities to
assess the innovation potential of possible partners before they commit to joining
them in collaboration. Conducting R&D in-house can strengthen the fi rm's ability
to recognize promising projects initiated by others. It can also be a strong and favor-
able signal to the stock market, reasserting the fi rm's aptitude to generate innovation
independently of others.
But there could be another, less apparent strategic reason behind incumbents'
reluctance to curtail investments in own R&D. Gans and Stern (
2000
) advance
the argument that there are conditions under which incumbents may consider
biotech fi rms' R&D a strategic
substitute
for their own research, rather than a
complementary asset they can easily acquire. In the presence of a market for
ideas, incumbents obtain bargaining power if they develop and maintain cut-
ting-edge R&D capabilities of their own. For the biotech fi rms, incumbents'
own R&D constitutes a credible threat of potential competition, particularly if
information spillovers can preempt innovation outcomes. In case commercial-
ization is costless and can be handled by biotech fi rms with no partner participa-
tion (i.e., in the absence of a need to engage external platforms to market), own
R&D capacity assumes the role of leverage for the large pharmaceutical fi rms
and can raise the share of the innovation rents they capture in strategic
partnerships. Gans and Stern (
2000
) show analytically that in a dynamic bar-
gaining game, incumbents' ability to undertake imitative R&D acts as a negative
market externality that can weaken the entrant's position.
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