Wednesday, April 20, 2016 | 12:00pm-13:00pm | Room 331, HSBC Business School Building

Abstract

We examine the effects of differential initial competence within highly innovative startup firms on their innovation strategies and growth. Using a detailed project-level development database for private firms in the drug industries, we show that firm R&D competence is persistent over long periods of time. This suggests that the large part of the cross-sectional variation in R&D performance is initially determined. Based on the persistence of R&D competence, we find that firms with high initial competence are more likely to be exploitive by focusing on their best segment and grow faster and more successfully than firms with low initial competence. Specifically, they exit through an IPO earlier or receive a greater amount of venture capital funding. On the contrary, firms with low initial R&D competence tend to be explorative by operating in multiple segments, thereby increasing the value of their innovation under the option-like payoffs of innovation. Our results are consistent with the persistent initial competence leading to different innovation strategies and growth.