This paper analyzes American pharmaceutical firms' persistence in innovating just before the wave of mergers and acquisitions that accompanied the "Biotech revolution". We evaluate the impact of past innovative activity on firms' innovation propensities using a non-linear GMM estimator for exponential models that allows for predetermined regressors and linear feedback. We find that innovative activity at the firm level depends strongly on the scope of past innovations. Breakthroughs in particular depend largely on past quality innovation made by firms, and this effect may likely deter further pioneering discoveries rather than strengthen incentives to invest on non cumulative R&D. The results also shed light on the importance of small firms in the dynamics of innovation in pharmaceutical industry, and suggest that large firms persist in using patents strategically to remain dominant.
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Reinganum, Jennifer R., .
"Innovation and Industry Evolution,"
Working Papers
426, California Institute of Technology, Division of the Humanities and Social Sciences.
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Segerstrom, Paul S & Zolnierek, James M, 1999.
"The R&D Incentives of Industry Leaders,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 745-66, August.