Do firms benefit from investing in basic research? An empirical investigation for pharmaceutical firms

Nelson (1959) has argued that a private enterprise economy fails to provide adequate incentives for firms to invest in basic (scientific) research, due to the uncertain nature of basic research and appropriability problems of the outcome of basic research, that is, knowledge. Despite these difficulties, there may be rational reasons for profit-seeking private firms to conduct basic research with their own research money (Rosenberg, 1990). Firms that perform basic research may benefit, for example, from ‘first-mover advantages’. First-mover advantages refer to a wide set of advantages that firms can obtain from being the first to possess new knowledge resulting from basic research, such as the acquisition of valuable assets (whose value becomes apparent from the new knowledge) or the creation of new products and production processes which, in case of effective patent protection, may (at least temporarily) block competing firms. In addition, firms can improve the efficiency of their technology activities by doing basic research. Scientific knowledge, resulting from basic research activities, helps firms to gain a better understanding of the technological landscape in which they search for new inventions, informs them about the most profitable directions for applied research, and helps them to better interpret findings of applied research (Rosenberg, 1990; Fleming and Sorenson, 2004). Internal basic research capabilities also allow firms to better monitor, interpret and absorb scientific knowledge that is conducted externally to firms (Cohen and Levinthal, 1990; Gambardella, 1992).