Searching in the Dark: Exploring the Technological Search Process during the Business Cycle and in the Pharmaceutical Industry

Technological innovation is considered as one of the main engine of long-term economic growth. Advancements in several domains have contributed to the outward shift of the production-possibility frontier paving the way to economic development. In particular, technological change occurs when new or improved technologies are introduced into the existing repertoire of knowledge. Drawing on the theory of recombinant invention, this dissertation explores the type and direction of the search process underlying inventions. Although there has been a fruitful discussion on firms' search processes in the existing literature, the question of how the external environment influences firms' search strategies remains still underexplored. This dissertation contributes to a better understanding of the crucial role of environmental characteristics in shaping the direction and success of firms' search process through three main studies. The first study presents a measure -"Unconventionality"- of the extent to which knowledge is combined within inventions in an unconventional or atypical way. This indicator focuses on the proximity among the knowledge components recombined in invention providing insights about the relative distance among fields of knowledge that are recombined. Rather than looking at backward citations, as other measures have done, the Unconventionality indicator examines patent class membership and the joint occurrences of subclasses along the entire technological landscape. The analysis uncover that a large fraction of patent is based on conventional knowledge recombination resulting from local search. Inventions that build on more novel combinations are rare but more cited, in particular those inventions drawing from established paradigms but that introduce a disruptive combination of components. The second study investigates the impact of the business cycle on firms' search strategies. Tighter economic conditions not only affect the propensity of firms to invest in R&D, but are also expected to shape the type of inventions that are generated. Results suggest that contractive phases of the cycle are associated with more conventional recombination signaling local search strategies, i.e. knowledge recombination processes that, by combining familiar components, generate inventions characterized by lower level of novelty. Firms respond asymmetrically to expansions and contractive phases showing overall a pro-cyclical trend both at the intensive (a decrease in the degree of unconventionality of patents) and at the extensive margins (an overall decline in number of patents). This process is concentrated in firms’ core technologies and for financially constrained firms indicating that the mechanism behind the result acts through a decrease in financial resources. The third study explores the outcome of the search process by considering the likelihood of success of focal projects that build on previous drug development efforts. Results show that projects that build on firms’ previous successful projects have a higher likelihood to generate marketable drugs, while building on prior failures reduces this likelihood. A similar pattern, though weaker in magnitude, is observed for drug development projects building on prior projects of other firms through vicarious learning