SCALE, SCOPE, AND SPILLOVERS - THE DETERMINANTS OF RESEARCH PRODUCTIVITY IN DRUG DISCOVERY

We examine the relationship between firm size and research productivit y in the pharmaceutical industry. Using detailed internal firm data, w e find that larger research efforts are more productive, not only beca use they enjoy economies of scale, but also because they realize econo mies of scope by sustaining diverse portfolios of research projects th at capture internal and external knowledge spillovers, In pharmaceutic als, economies of scope in research are important in shaping the bound aries of the firm, and it may be worth tolerating the static efficienc y loss attributable to the market power of large firms in exchange for their superior innovative performance.