Scale, scope, and spillovers: The determinants of research productivity in drug discovery
This article is one in a series from Henderson and Cockburn using a dataset of internal firm data from a series of the world largest pharmaceutical data to use project-level data to speak to key issues in innovation. This article gets at key questions in the literature on innovation by exploring the relationship between firm size and research productivity. Their essential finding is that large firms are more productive not only because of economies of scale, but also because of economies of scope.
Henderson and Cockburn introduce their article with evidence from a broad literature that shows mixed results in terms of the relationship between size and R&D efficiency. The authors show that there are significant returns to size but that most of these are due to economies of scope, not economies of scale. In other words, large firms assemble broad portfolios of research project which are used to create a set of internal spillovers which aid the effectiveness of research projects. The authors find evidence of substantial knowledge spillovers within firms.
The authors use an incredible dataset assembled from within pharmaceutical firms and that includes detailed project level data.
The paper's basic finding is that while the appears to be no returns to scale at the firm level. However, when the data is broken down into projects for analysis, the authors find that there are economies of both scale and scope at the level of the firm. Programs embedded in larger and more diversified firms are significant more productive than programs outside. The basic argument is that previous work which found no relationship was due to the fact that authors had used inappropriately aggregated data. Additionally, the authors find strong evidence for spillovers between firms.
Theoretical and practical relevance:
Henderson and Cockburn's article has been cited more than 600 times in the 14 years since it's publication, primarily in the literature on technological innovation.