Chapter 1 examines the strategic conditions that drive entrepreneurial innovators to pursue novel innovation rather than innovation that is closer to existing technologies. To an increasing extent, startups commercialize innovation in a cooperative setup. Because radical breakthrough innovation is more difficult to communicate than its incremental counterpart, entrepreneurial innovators may avoid breakthrough innovation for which the cost of developing credible information is exceedingly high. In the context of the Orphan Drug Act (ODA), this study uses a difference-in-difference approach to measure whether entrepreneurs are more likely to bring novel innovations to the market when the policy change unexpectedly lowers the cost of obtaining information that will convince investors through a small market test. Using a new measure of the novelty of innovation and a detailed panel dataset of therapeutic molecules, this empirical study finds that biotech startups bring more breakthrough drugs to markets affected by ODA. This research also finds that in ODA-affected areas, entrepreneurs hold novel projects longer before contracting with partners and aim to generate more revenue streams from pursuing novel innovation. Taken together, the results of this study suggest that the cost of convincing investors prevents entrepreneurs from marketing novel innovation and that a public policy can moderate inefficiency in the “market for ideas” by decreasing communication costs.
In Chapter 2, I study the impact of complementary assets on the form of partnership between innovative startups and established firms seeking technology commercialization. As startups develop complementary assets, the small innovating firms increasingly take active parts in advanced-stage development processes, which enables small firms to better convince partners of the prospect of innovations. At the same time, the new asset acquisition makes them less dependent on the partnership with established firms. In the context of ODA, I find that biotech firms are more likely to engage in partnership during clinical trial stage rather than during pre-clinical stage. The delay of partnership suggests that startup firms advance their innovations further so that they can convey rich information on the prospect of drugs to potential partners. I find evidence that the propensity of licensing increases in a group of molecules disproportionately impacted by ODA. Lastly, this study documents that the relationship between licensing and drug approval outcomes becomes less tight, although the approval of novel drugs appears to still heavily depend on the commercialization capabilities of licensing partners.
In Chapter 3, I study how ODA affects the timing and the feature of investments of venture capitalists (VCs). VCs invest in innovations at nascent stage, which inherently incorporates huge risks. Because it is difficult to valuate the prospect of novel technologies at the early development stage, however, VCs may be herded into finance advanced-stage projects for which an archive of scientific knowledge and commercial performances necessary for a correct valuation is available. An institutional change can steer the investors toward supporting new innovations at early stage, by providing more information necessary to valuate the young projects. In the context of ODA, I find that VCs are more likely to invest in early-stage technologies. To reduce the risk of failure, moreover, firms invest in a team rather than putting a huge amount into a round being a sole investor. Finally, I document that the exit performances of VC-backed startups do not get worse as a result of VCs investing into early-stage innovations. It suggests that VCs are enabled to make fully-informed decisions thanks to information provided by ODA, rather than merely speculate on risky and highly uncertain projects.