DP14861 Disruptive Innovation and R&D Ownership Structures of the Firm

Author(s): Di Guo, Haizhou Huang, Kun Jiang, Chenggang Xu
Publication Date: June 2020
Keyword(s): Capitalism, Innovation, Socialism, Soft-budget Constraint
JEL(s):
Programme Areas: Financial Economics, Industrial Organization, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14861

Among the 87 revolutionary innovations in the world over the life of the Soviet Union, 86 were invented in capitalist economies (Kornai, 2013). This paper studies why this is the case. This paper provides a theoretical foundation, which explains why disruptive innovations are organized and financed with a large number of independent small firms in a capitalist economy. Whereas not allowing private ownership, this kind of arrangement is not an option in an economy where only state ownership exists. This paper also contributes to empirical work on disruptive innovation, which is missing in the literature. We use FDA approved new molecular entities (NMEs) in the pharmaceutical industry as a proxy of disruptive innovation in the industry. Although pharma firms are often very large in size, their R&Ds for developing NMEs depend deeply on forming R&D alliances with independent small R&D firms. We find NMEs invented by a pharma firm is positively and significantly associated with the number of R&D alliances that the firm creates.