Calling It Quits: A Behavioral Perspective on Exploration and Exploitation in R&D Project Termination

ABSTRACT Not every R&D project will succeed, necessitating a careful selection of which R&D projects to pursue and which to terminate. Timely termination decisions free up scarce resources for more promising projects. Yet, prior research has yielded inconclusive results on how firms terminate exploratory versus exploitative R&D projects. Given that early‐stage R&D project termination is a decision made under high uncertainty, we adopt a behavioral perspective to reconcile the inconsistent findings. We propose that a firm's preference for terminating exploratory versus exploitative projects depends on three sources of contextual feedback: parallel projects, prior collaboration experience, and firm performance. We test our hypotheses using drug development projects from pharmaceutical firms over 11 years, finding that exploratory projects are less likely to be terminated relative to exploitative ones when the number of parallel projects is limited, when they are conducted with an existing partner, or when firm performance falls below aspiration.