Application-Specific R&D Capabilities and the Advantage of Incumbents: Evidence from the Anticancer Drug Market

This paper examines the proposition that during competence-destroying technological changes, incumbents are incompetent in researching in house a radically new technology. They only retain market leadership if their undestroyed, proprietary complementary assets compensate for their research incompetence. In contrast to prior research, I propose that there is not one but two sets of capabilities necessary to execute research and development (R&D), sets that differ in their market specificity: a technology-specific set (i.e., technological platforms that are non-market specific) and an application-specific set (i.e., knowledge of the application that is therefore market specific). Although all markets require both sets of capabilities to execute R&D, prior research has analyzed cases where the application was not as complex, and therefore application-specific capabilities did not represent strategic factors. Because at the start of a technological discontinuity application-specific capabilities are undestroyed and have accrued only to incumbents, when complex enough, these capabilities can represent a source of competitive advantage for these firms, even in the face of competition from diversifying entrants reusing previously acquired technological platforms. I find evidence consistent with my proposition based on data on outcomes from drug discovery (as estimated through clinical endpoints in phase I trials) for firms competing in the anticancer drug market, one of the most complex markets within pharmaceuticals, as the market transitions into the biotechnology revolution. The proposition in this paper implies that although technological platforms can help firms move across markets, application-specific R&D capabilities can help firms retain leadership within a market across technological discontinuities.