Pharmaceutical and biotechnology companies are often mentioned in the same breath as research and development. Take, for instance, Nymox Pharmaceutical, which held its annual meeting on June 8 in Montreal, Quebec. The company, which also has a facility in Hasbrouck Heights, New Jersey, specializes in the research and development of therapeutics and diagnostics for the aging population. At the annual shareholders meeting, CEO Paul Averback emphasized the company’s strategy of building a large worldwide patent portfolio in support of its proprietary product development programs. Its research and development, said Averback, was progressing in several key areas.

Such company reports conjure images of white-coated scientists endlessly eyeballing laboratory microscopes as they devise the next best therapeutics and treatments. Truth be told, their existence is not necessarily so sheltered. Pharmaceutical and biotech firms rely on knowledge that exists outside the boundary of the firm in their own research and development efforts. The president of Centocor, a biotechnology company, claims that by providing his firm’s scientists the freedom to stay current with and make contacts in the scientific community, “Centocor should know about major research at least a year before it’s published.”

This is according to the research of Kira R. Fabrizio, an assistant professor of organization and management at Emory University’s Goizueta Business School. In her yet-unpublished paper “Absorptive Capacity and Innovation: Evidence from Pharmaceutical and Biotechnology Firms,” Fabrizio asks and answers the question: Why are some firms better able to exploit knowledge that exists outside the boundary of the firm?

“The absorptive capacity of the firm is its ability to reach outside its boundaries and pull in the knowledge that is floating around out there, in this case specifically university research,” explains Fabrizio, who joined the Goizueta faculty a year ago after completing her Ph.D. at the Haas School of Business at the University of California, Berkeley and spending a year visiting at the Boston University School of Management. “My work in a previous paper looked at how the transfer of research knowledge from universities to firms is affected by the fact that universities are now trying to seek formal property right protection to the knowledge, whereas before it used to be more naturally spilling over to firms. This paper turns that on its head and says, ‘let’s look from the firm’s perspective.’ Which firm activities help facilitate that transfer of knowledge from outside the firm boundaries, in this case from universities, into the firms for use in their research?”

Fabrizio sets out to do an empirical evaluation of knowledge transfer and the innovative performance of firms in the biotech and pharmaceutical sectors. She constructs a data set of 83 firms in these two sectors during the 1976-1995 period. Through this cross-firm analysis, Fabrizio explores the relationship between firm research activities and the citation of published scientific research in the firm’s inventions, and the speed with which the firm is able to exploit existing knowledge in new patented inventions. Fabrizio also studies internally developed research knowledge as a substitute for externally developed knowledge—in other words, do firms either focus on one or the other, but not both simultaneously?

“The literature relating to how firms are able to absorb knowledge from outside has always conjectured that by building up their internal research activities—the knowledge they have inside the firm—and then also building up collaborations with scientists outside the firm, puts the firm at an advantage for being able to absorb what comes from outside the firm into their own research processes,” notes Fabrizio. “The intermediating mechanism of being able to absorb more of the external science has been the mechanism that people associated with the performance outcomes, but has never been directly tested.”

The first contribution of Fabrizio’s research is a direct test of this mechanism that shows that actually doing these research activities is associated with using more of the science that is coming out of universities. Secondly, she answers the question: “How are firms benefiting from being able to tap into university science? “I theorize that it facilitates their search process for new innovation,” explains Fabrizio. “They’re able to gain new knowledge that they couldn’t before and potentially gain it more quickly. I show that for at least this subset of firms, it looks like the firms that are absorbing more of the knowledge from universities and innovating more quickly on existing knowledge, have higher adjusted market values. They are getting measurable benefits,” adds Fabrizio.

One of the most interesting findings of this research, notes Fabrizio, has to do with a firm’s strategy of building on both internally and externally generated knowledge. “The greatest benefits, in terms of an efficiency search for new innovation, appear to accrue to firms that are doing both internally focused and externally collaborative research activities,” she explains. “This goes to the core of the age-old question of why firms engage in basic science research and how basic science research enhances the innovative performance of firms in industry.”

Fabrizio’s research highlights that the science coming out of universities doesn’t automatically spill over into firms. Firms should therefore be doing some purposeful investment that will allow them to take advantage of university science. “By building up the collaboration networks with university scientists or by building up their internal knowledge and abilities for research, then they are able to take advantage of the knowledge generated at universities,” notes Fabrizio.

She adds that her research also has implications for policy debates. Some people suggest limits on the interaction between industry and university because they feel university scientists might not be as objective in their research,” says Fabrizio. “The results here suggest that any severe limitations of that interaction would have consequences for industry innovation, where it could either slow down industry innovation or prevent some of the innovation that is going on because the interactions between the scientists are so important to the knowledge transfer between the two types of organizations.”

While still focused on her interests of knowledge transfer, innovation and management of technology, Fabrizio is moving somewhat beyond pharma and biotech in her current research project. She is exploring how doctors innovate in the medical device field.