The value of innovation and the spillover effect on alliance partners
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The value of innovation and the spillover effect on alliance partners Jianping Qi1 · Ninon K. Sutton1 · Qiancheng Zheng2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper investigates the value of innovation for pharmaceutical firms and their strategic alliance partners. Rather than relying on the standard patent data to measure innovation success, we use a comprehensive data set on drug approvals by the United States Food and Drug Administration to examine the value of innovation for the drug companies and their alliance partners. In examining FDA approvals with different levels of innovation significance, our evidence shows that shareholders of the innovating firm and its alliance partners both benefit significantly from announcements of radical innovation. Furthermore, young, newly-public alliance partners with strong growth opportunities experience stronger spillover effects from radical innovation. More recently formed alliances are also associated with more significant spillover effects on alliance partners. Exploring the potential downside of alliance partnerships, we find that adverse events such as FDA warning letters or drug withdrawals cause significant wealth loss to the drug manufacturers, with some negative spillover effects on the firms’ alliance partners. Keywords Innovations · Alliances · Spillover effect · Asymmetric gains JEL Classification O31 · O32 · G34 · L24
1 Introduction The quest for innovation is an inherently risky business defined by high-risk, high-reward investments. While the prospect of successful innovation holds strong appeal to investors, innovative activities do not always pay off. For example, in the pharmaceutical industry,
* Qiancheng Zheng [email protected] Jianping Qi [email protected] Ninon K. Sutton [email protected] 1
Muma College of Business, University of South Florida, Tampa, FL 33620, USA
2
School of Business, Emporia State University, Emporia, KS 66801, USA
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even on patented compounds which in themselves result from past innovation success, the probability is as low as 0.01% for a patented compound of a biotech firm to enter the drug discovery process and make it to an eventual FDA approval (PhRMA 2013). Given the substantial risk and uncertainty associated with innovation, many firms form strategic alliances to share costs and benefits as well as to improve the efficiency and quality of their innovative pursuits. Previous studies examining the benefits of strategic alliances document a positive connection between alliances and increased output of innovation, as measured by patent activities (e.g., Sampson 2005; Danzon et al. 2005; Hess and Rothaermel 2011). However, beyond the standard measures of patent productivity, evidence is limited on the value of innovation for innovating firms and for their alliance partners. Our paper attempts to bridge this gap. In our study, instead of relying on the standard patent data to measure innovation success, we use a direct, comprehensive data s
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