2020
Working Paper
HBS Working Paper Series

Find and Replace: R&D Investment Following the Erosion of Existing Products

By: Joshua Krieger, Xuelin Li and Richard T. Thakor

Format:Print
| Language:English
| Pages:87

Abstract

How do innovative firms react when existing products experience negative shocks? We explore this question with detailed project-level data from drug development firms. Using FDA Public Health Advisories as idiosyncratic negative shocks to approved drugs, we first examine how drug makers react through investment decisions. Following these shocks, affected firms increase R&D expenditures, driven by a higher likelihood of acquiring external innovations, rather than developing novel projects internally. Such acquisition activities are concentrated in firms with weak research pipelines. We also find that competing developers move resources away from the affected therapeutic area and into exploratory projects. Our results have important implications about how firms’ commercialization capital investments affect their subsequent R&D decisions.

Keywords

R＆d Investments; Drug Development; Product Shocks; System Shocks; Research and Development; Investment; Behavior; Pharmaceutical Industry

Citation

Krieger, Joshua, Xuelin Li, and Richard T. Thakor. "Find and Replace: R&D Investment Following the Erosion of Existing Products." Harvard Business School Working Paper, No. 19-058, December 2018. (Revised May 2020.)