1 Does Market Selection Reward Innovators? R&D, patents, and growth in the US Pharmaceutical Industry

If market ‘selection ’ works, and if innovation leads to greater efficiency (higher quality and/or lower costs), then one should expect to find a relationship between innovation and firm growth. Yet the empirical evidence for the impact of innovation on firm growth is rather mixed. The paper looks at the relationship between innovation and firm growth, and the effects of this relationship on market structure for the pharmaceutical industry (firms quoted on the US stock market between 1950-2003 and sub-periods). We find that innovation (proxied via R&D spending, patents and citations) affects growth rates only for firms with particular characteristics. These are firms that are persistent innovators, have biotechnology alliances, and are small. This suggests that market selection operates on a mix of firm characteristics. Furthermore, it is precisely firms with these characteristics which shape the ‘complex’ patterns in industry structure which have recently caused many industrial economists to puzzle over the non-gaussian properties of firm size and growth (e.g. bimodality of firm size distributions and fat tails in the growth distributions)