Trials and Terminations: Learning from Competitors' R&D Failures

by Joshua Lev Krieger

Overview — When companies terminate R&D projects, it has ripple effects on the project selection decisions of rival firms and the broader competitive environment. Examining firm responses to others’ failures, this paper introduces a new model of R&D investment decisions, and empirically investigates when knowledge generated by rivals directly enters specific project investment decisions.

Author Abstract

I analyze project continuation decisions where firms may resolve uncertainty through news about competitors' failures as well as through their own results. I examine the trade-offs and interactions between product-market competition and technological learning from parallel R&D projects in the setting of drug development. Leveraging the biopharmaceutical industry's unique characteristics to overcome barriers to measuring the project-level response to competitor news, I employ a difference-in-differences strategy to evaluate how competitor exit news alters a firm's own project discontinuation decisions. The findings reveal that technological learning dominates competition effects. Firms are most sensitive to competitor failure news coming from within the same market and technology area—more than doubling their propensity to terminate projects in the wake of this type of information. I also find evidence that firms overreact to failure news from closely related competitor projects. Finally, I investigate project- and firm-level characteristics that drive persistent differences in decision-making performance.