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Investing in Innovation: Evidence from the Pharmaceutical Industry

  • Author(s): Stearns, Kira E
  • Advisor(s): Lieberman, Marvin
  • Chen, Keith
  • et al.

This dissertation explores the role that organizations play in bringing scientific innovations to society. Chapter 1 situates this work in the current landscape of innovation research and motivates the need for further research on this topic. Chapter 2 explores the role that

failure, both technological and regulatory, plays in understanding how organizations make future investments in innovative projects. I find that following FDA rejection, biopharmaceutical firms become significantly less likely to further invest in unrelated products already under development. However, they experience a higher proportion of future successes, as they redirect investment into less risky innovations. In contrast, I find no evidence of these effects in response to technological failures at the end of clinical trials, suggesting that this effect is not driven by the loss of firm value nor does it support a traditional Bayesian updating framework. Rather, these findings are consistent with the idea that there is a difference between failure at the technological level versus failure at the decision making level.

Chapter 3 illustrates how the boundaries of an organization influence the type of innovations in which organizations do and not choose to invest following a sudden reshuffling of consumer demand. I demonstrate that a sudden increase in market size (and therefore expected revenue) increases an established firm’s propensity to make larger investments in products in their pipeline that are less likely to receive approval. However, I find that this result only holds for those organizations that diversify into fewer therapeutic spaces and are additionally more centralized. I theorize that, in line with findings from organizational economics and internal capital allocation inefficiency, this is due to management having greater control over resource allocation decisions in more centralized firms.

Finally, Chapter 4 studies how the type of innovation pursued may affect market outcomes and competitive interactions between organizations. Using drug repurposing as a research context, I explore how the repurposing of a pharmaceutical drug for a new disease impacts its sales, and the sales of its competitors, for other approved uses. By leveraging variation in the combination of diseases that one drug treats and the timing of those disease approvals, I find a positive spillover effect of repurposing on sales of the drug for other diseases and this effect also spills over into the drug’s close competitors. Furthermore, I find that this growth in sales comes at the expense of competitors further away in therapeutic type. These findings have important implications for a pharmaceutical firm’s R&D strategy and the strategic responses to be made by competitors.

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