Innovation and Strategic Divergence: An Empirical Study of the U.S. Pharmaceutical Industry from 1920 to 1960

Abstract

Today, firms employing two distinct survival strategies—(1) innovation and (2) imitation —coexist in the U.S. pharmaceutical industry. History indicates that this intraindustry heterogeneity did not exist prior to 1940. This study empirically investigates the origin of this strategic divergence by focusing on changes in firms' R&D inputs and outputs. It finds that some U.S. pharmaceutical firms responded to the opportunity presented by the discovery of antibiotics in the 1940s by investing more in R&D, while many others did not. Over time, the innovators dominated in developing new drugs, and the gap between innovators and imitators steadily increased. These findings also shed light on “the genesis of strategic groups,” a phenomenon that is not yet well understood.