Experience and the Hit Rate for Entrepreneurial Initiatives

Abstract

The hit-rate perspective on innovation contends that firms cannot improve their success rates and, so, can increase their number of successes only by making more attempts. On the other hand, an organizational learning perspective suggests that firms can increase proficiency with processes they perform repeatedly. Basing hypotheses on these two perspectives, this study considers how a firm’s percentage of launches, or hits, from its new product development (NPD) portfolio is related to characteristics of its on-going NPD activity. The setting is drug development in the pharmaceutical industry, and the analysis uses panel data for 77 firms over the years 1997 – 2006. The launch rate measure considers that drugs either are launched or are dropped from the portfolio when development is discontinued. Results reveal a negative relationship between the number of projects in the portfolio and the launch rate. There is an inverted-U curvilinear relationship between the percentage of projects that are newly initiated and the launch rate. The test of an interaction indicates that launch rate decreases with increases in the percent of new projects in knowledge categories that are new to the firm. These results imply that project portfolios characterized by activity that is a stretch from the base of experience tend to exhibit lower launch rates.