Geographic Organization and Commercially Successful Innovations in the Pharmaceutical Industry

Abstract

Prior research has tied the geographic organization of firms’ innovative activities to knowledge creation and innovation. However, the theory offered and empirical results are conflicting and inconclusive. Some theorize that the geographic dispersion of firms’ innovative activities (GDFI) can facilitate external knowledge acquisition and recombination. Others argue that GDFI can dampen or stifle internal knowledge sharing and development. I present a three-part dissertation to shed new light on the relationship between GDFI and innovation. The first part involves an extensive literature review, aiming to catalog the theoretical links between GDFI and innovation. It also synthesizes prior empirical findings to provide a comprehensive understanding of the topic. In the second part, I propose a situated theory of GDFI and innovation, arguing that the negative effects of GDFI will be minimized in high-stakes environments where the pressures and incentives to innovate are very high. Moreover, I argue that the negative effects of GDFI can be dampened and the positive effects enhanced by two moderating factors: firms’ external network strength and knowledge breadth. This theory is tested in the pharmaceutical industry – arguably a high-stakes innovative environment. This testing relied on extensive primary and secondary data collected for the population of public pharmaceutical firms (or 136 firms) - defined as firms that are publicly listed on a stock exchange and have obtained one or more New Molecular Entity (NME) approval by the FDA over a period of 20 years. This study finds that firms’ GDFI indeed has a positive relationship with the number of NMEs obtained. Firms’ knowledge breadth and external network strength are found to negatively moderate the relationship between GDFI and innovation. In the third part, I undertake a longitudinal historical study of two of the largest global pharmaceutical firms, Pfizer and Merck, over a seventy-year time frame to examine in more depth the organization of R&D and its relationship to innovation. These two firms are important for contrast since they have taken very different research approaches. Merck has focused for most of its history on internal knowledge development and fewer therapeutic areas. It also has kept a relatively stable geographic organization of R&D. Pfizer has drawn more extensively on external knowledge and licensing since its early days while undertaking research in many therapeutic areas. It has also had a much more dynamic R&D organization. The two case studies of Pfizer and Merck indicate support for the theory presented in this dissertation and offer a more nuanced understanding of the benefits and diseconomies associated with GDFI and the limits to such benefits.