Project suspensions and failures in new product development: Returns for entrepreneurial firms in co-development alliances

Abstract

Entrepreneurial biotech and large pharmaceutical firms often form alliances to co-develop new products. Yet, new product development (NPD) is fraught with challenges that often result in project suspensions and failures. Considering this, how can firms increase the chances that their co-development alliances will create value? To answer this question, the authors build on insights from signaling theory to argue that prior project suspensions provide positive signals leading to an increase in value creation, while project failures have the opposite effect. In addition, drawing on insights from temporal construal theory, this research predicts that the strength of these effects is contingent on the stage along the exploration-exploitation continuum at which the alliance is formed. The authors undertook event study analyses of 248 alliances formed by 104 biotechnology firms from the United States and Europe listed on eight stock exchanges over an 8-year period between 1996 and 2003. The results confirm that prior NPD project suspensions have a stronger value creation effect (or prior failures have a weaker value destruction effect) in the case of exploration alliances in the upstream of NPD processes than in the case of moderate-scale exploitation alliances in the downstream of NPD. This study is among the first to examine how both prior NPD project suspensions and failures of firms affect the abnormal returns achieved from co-development alliances. This research therefore contributes to the innovation literature by honing a better understanding of setbacks and failures in NPD. Moreover, the findings contribute to the literature on strategic alliances by identifying new conditions under which firms can create or preserve value. This research also contributes to signaling theory by providing evidence of the moderation effect caused by the signaling environment. Finally, this study contributes to the entrepreneurial literature on value creation for entrepreneurial firms in alliances following adverse events.