Portfolios of Interfirm Agreements in Technology-Intensive Markets: Consequences for Innovation and Profitability

Portfolios of Interfirm Agreements in Technology-Intensive Markets: Consequences for Innovation and Profitability

Research Question

New product development has a broad range of determining factors. Such determining factors include the voice of the customer, internal knowledge development, and organizational processes and capabilities. In technology-intensive markets, firms need to corporate with each other to develop new products. “However, most research has concentrated on interfirm agreements in isolation, with special attention to dyadic information transfer and coordination and relation embeddedness” (p. 88). This research is a test of the pharmaceutical industry; it provides support for a development theory but yields unexpected insights. It asks if research and development affect firms’ portfolios, if the advances enhance profitability, and if innovations affect profitability.

Hypothesis

H1: Greater Technological diversity of a firm’s portfolio of interfirm research and development agreements enhances the firm’s (a) radical innovation and (b) incremental innovations

H2: Higher levels of repeated partnering of a firm’s portfolio of interfirm research and development agreements enhance the firm’s (a) radical innovation and (b) incremental innovation.

H3: A firm’s stock of radical innovations and its stock of incremental innovations enhance profitability.

H4: The effect of a firm’s stock of radical innovations on profitability is greater than the effect of a firm’s stock of incremental innovations on profitability.

H5: When the level of innovation is controlled for, greater technological diversity of a firm’s portfolio of interfirm research and development agreements lowers the firm’s profitability.

H6: When the level of innovation is controlled for, the level of repeated partnering of a firm’s portfolio of interfirm research and development agreements has a inverted U-shaped effect on the firm’s profitability.

Methodology:

Data Collection

The data collected for this article came from four sources. First, they collected “data on pharmaceutical firms’ upstream research and development with biotechnology firms from the Recombinant Capital database” (p. 92). This data was classified into 42 technological classes. Second, they collected data on new drugs from the drug approval list form the Food and Drug Administration. Third, “they collected data on profitability, firm size, sales expenses, and research and development expense from the Compustat database.” (p. 92).

Measurement

Dependent Variables:

The dependent variable in the experiment was the radical innovation. The radical innovation is the total number of new radical drugs that the FDA approved in a given year. Radical drug properties of distinction are of a drug’s therapeutic potential and its chemical type. These drugs have “active ingredients that have never been marketed” (p.92). Only 13.7% of the newly approved drugs in their database are labeled as so.

They also measured incremental innovation. Incremental innovation is the total number of new drugs that a firm did not received FDA approval in that given year. These drugs are labeled as so.

Profitability was the final dependent variable measured. The profit is the net income subtracted from any loss within the year. It was found in the financial statements.

Independent Variables:

Technological diversity is the independent variable. As the independent variable, it is the most costly, the higher the level the higher the costs.

Results

They “estimated a negative binomial maximum-likehood regression model, which is an appropriate specification in view of the count character of the dependent variable and the relatively large number of zeros.” (p. 94). They found that a Poisson specification was not appropriate because of over dispersion.

They accepted H1 because technological diversity was positively influencing radical innovations and incremental innovations. Thus, the more diverse the portfolio the less likely the firm is to abstain from new technological developments.

H2a was accepted. “Repeated