Does market selection reward innovators?

Abstract

The paper contributes to an emerging literature that critically questions the degree to which R&D, at the centre of national and transnational innovation policies, results in firm growth. The differences in how innovation affects firm growth is explored for small and large publicly quoted US pharmaceutical firms between 1950 and 2008. We observe that the positive impact of R&D on firm growth is highly conditional upon a combination of firm specific characteristics such as firm size, patenting and persistence in patenting. For large pharma firms, R&D affects firm growth positively with the exception of those that do not patent. On the other hand, for small firms, R&D boosts growth for only a small subset of firms: namely those that patent persistently for a minimum of 5 years. The results also provide some important insights for our understanding of the structural characteristics underlying ‘fat tails’ in firm growth distributions: the tails are fattest when the sample in question includes the persistent innovators