Institutions and innovations: A longitudinal study of institutional endorsement and firm innovation in the pharmaceutical industry, 1980--2004.

Abstract

In this dissertation I examine two questions related to the interplay between institutions and innovations. First, I ask the question (1) How can firms influence the regulatory approval of an innovation? Despite the importance of regulatory approval for the success of firm innovation in many industries, little is known about how firms can influence approval. I argue that firms seek the endorsement of innovations by the scientific community to mitigate the uncertainty faced by regulators, thus facilitating regulatory approval. Second, I ask the question (2) How does the endorsement of an innovation affect subsequent competition? Prior research has emphasized the benefits of endorsement but overlooked its competitive implications. I argue that the endorsement by the scientific community of an innovation building on a new scientific principle makes rival firms more likely to introduce similar innovations. To test my arguments I build a longitudinal dataset on new pharmaceutical drugs introduced between 1980 and 2004. I find that publications in top medical journals by the firm sponsoring a new drug contribute towards accelerating FDA approval, especially when the new drug pioneers a new pharmacological mechanism of action. I also find that, by seeking such form of scientific endorsement, the pharmaceutical firm pioneering a new mechanism of action attracts the entry of similar drugs based on that mechanism. This dissertation shows that firms can use endorsement by an institutional constituent to which they have easier access to affect decisions made by another key institutional constituent. It also highlights the competitive implications of endorsement by showing that firms' quest for the endorsement of innovations attracts competition to the underlying technological opportunity, potentially limiting firms' ability to appropriate value from innovations. Prior work has shown that the introduction of innovations based on novel science are potentially destabilizing, often leading to the failure of established firms, given their difficulty in assimilating the underlying new knowledge. This research, by showing that the attempts made by the firm pioneering a new scientific principle to elicit endorsement facilitate the transition of rival firms to the new technological opportunity, demonstrates how the institutional context contributes to reducing the destabilizing nature of this type of innovation.