| This research is an examination of the determinants of the productivity of research and development (R&D) in the US pharmaceutical industry. The pharmaceutical industry is the most R&D-intensive of all US industries and has seen intense horizontal merger activity in recent years. The pharmaceutical industry is thus a prime candidate for the analysis of the determinants of its productivity.;Specifically, this study tests for technological/knowledge spillovers, returns to diversification versus specialization of the R&D portfolio, and economies of scale in R&D. This research is the first to use confidential US Census Bureau data on both private and public pharmaceutical firms in addressing these issues. The estimation of the optimal degree of diversification of pharmaceutical R&D is also unique to this study, while only one other study has considered R&D spillovers in the pharmaceutical industry.;I introduce an R&D knowledge production function and model counts of FDA approvals of an NME as a function of lagged R&D expenditures, public and private R&D knowledge, and the breadth of R&D operations.;The empirical results show that there are significant and meaningful R&D spillovers both between firms and within firms, suggesting that an optimal R&D strategy may be to either merge with other firms with similar R&D portfolios, or to wait for rivals to innovate and then mimic or 'piggy back' rivals' research.;I also find evidence to support the notion of an optimal degree of diversification of a pharmaceutical firm's R&D portfolio. This evidence is consistent with observed behavioral trends in the industry: firms do not typically specialize and focus their research activities in one particular therapeutic category, nor do they get involved in every research area.;Finally, the empirical results show that the marginal physical product of R&D initially rises with firm size and then falls as diminishing returns set in for the largest firms. Such evidence might be cited as a driving force behind recent mergers in the industry. Cost-cutting and other productive synergies are, in fact, the very explanations that the merging firms use to promote the mergers that we observe in this industry. |
