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Corporate structure, indirect bankruptcy costs, and the advantage of de novo firms: the case of gene therapy research

Sosa, M. Lourdes (2014) Corporate structure, indirect bankruptcy costs, and the advantage of de novo firms: the case of gene therapy research. Organization Science, 25 (3). pp. 850-867. ISSN 1047-7039

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Identification Number: 10.1287/orsc.2013.0876

Abstract

Current literature demonstrates that, at least initially, incumbents invest less in the in-house development of a new technology than do entrants, whether diversifying or de novo; this is because, for incumbents, new technology challenges managers’ mental models through changes in capabilities, revenue models, or product features. What has not been explored, despite its significance for strategic action, is whether (and if so, why) incumbent, diversifying, and de novo firms might invest differently across variants of a new technology through a discontinuity. This paper uses unique quantitative, archival, and interview data on the investment choices of incumbent, diversifying, and de novo firms around three variants of biotechnology—small-molecule, large-molecule and gene therapy drugs—to show there are differences in investment choices across groups of firms and to suggest that these can be explained through differences in volatility of outcomes across variants. When volatility in product performance generates volatility in firm-level outcomes, de novo firms can cap negative consequences through bankruptcy, an alternative that is extremely costly for established firms (whether incumbent or diversifying), given their complex corporate structure. By keeping indirect bankruptcy costs low, de novo firms’ simple corporate structure allows them to extract option value from volatility, making established versus de novo firms the key groups for analysis of investment choices, not incumbent versus entrant firms. This article thus identifies the interaction between a technological investment’s volatility and de novo firms’ simple corporate structure as the explanatory variable for the observed investment differences. I discuss implications for technology strategy and the competitive analysis of discontinuities.

Item Type: Article
Official URL: http://pubsonline.informs.org/journal/orsc
Additional Information: © 2014 INFORMS
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HF Commerce
Q Science > QH Natural history > QH426 Genetics
Sets: Departments > Management
Research centres and groups > Organisational Behaviour Group
Date Deposited: 11 Sep 2014 08:28
Last Modified: 19 Nov 2019 11:39
URI: http://eprints.lse.ac.uk/id/eprint/59433

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