Too Costly to Convince: How Do Entrepreneurs Market Breakthrough Innovation through Partnership?

This research examines the strategic conditions that drive entrepreneurial innovators to pursue novel innovation, rather than innovation that is closer to existing technologies. Since radical breakthrough innovation is harder to communicate than incremental counterpart, entrepreneurial innovators may be steered away from breakthrough innovation where the cost of developing credible information of breakthrough idea is exceedingly high. In the context of Orphan Drug Act (ODA), this study uses a differencein-difference approach to measure whether entrepreneurs are more likely to bring novel innovation when the policy change unexpectedly lowers the cost of developing convincing information through a small market test. Using a new measure of novelty of innovation and a detailed panel dataset of therapeutic molecules, the empirical study finds that biotech startups bring more breakthrough drugs in the markets affected by ODA. This research also finds that, in the ODA-affected areas, entrepreneurs hold novel projects longer before contracting with large partners and to generate more revenue streams from pursuing novel innovation. Taken together, this study suggests that the cost of convincing hinders entrepreneurs to market novel innovation and that a public policy can moderate the inefficiency in “market for ideas” by decreasing communication cost. KEY WORDS –technology commercialization strategy (TCS), innovation, entrepreneurship, inter-firm alliance, information asymmetry, biotechnology, the pharmaceutical industry 1 I’m very grateful to Yongwook Paik, Elisa Alvaraz-­‐Garrido, Jenny Kuan, Joshua Gans, David Hsu,