Do Firms Change Capabilities by Hiring New People

Do firms build new capabilities by hiring new people? We explore this question in the context of the pharmaceutical industry’s movement towards science-driven drug discovery. We focus particularly on the potential problem of endogeneity in interpreting correlation between hiring and changes in organizational outcomes as evidence of the impact of new hires on the firm, and on the more fundamental conceptual question of the conditions under which hiring might be a source of competitive advantage, given the well known objection that resources that are freely available through the market cannot be a source of differential capabilities. Using data on the movement and publication of “star” scientists, we find that the adoption of science based drug discovery within the firm is closely correlated with the hiring of star scientists. This correlation appears to be reasonably robust to a number of controls for endogeneity. We also show that the hiring of highly talented scientists appears to have a significant impact on the behavior of scientists already working within the firm. We interpret this as consistent with the idea that hiring may change organizational capabilities through the interaction of new talent with the policies, routines and people already in place within the firm.