Public Funding for Science and the Value of Corporate R&D Projects; Evidence from Project Initiation and Termination Decisions in Cell Therapy

• DOI: http://doi.org/10.1111/joms.12423
• Author: Hsini Huang,Simcha Jong
• Published date: 01 July 2019
• Date: 01 July 2019

Public Funding for Science and the Value of Corporate

R&D Projects; Evidence from Project Initiation and

Termination Decisions in Cell Therapy

Hsini Huanga and Simcha Jongb

aNational Taiwan Universi ty; bLeiden University

ABST RACT How do firms dec ide which R&D projects to pursue and which ones to cast as ide?

We use a real options approach to adva nce our underst anding of how firms mana ge uncertain-

ties in R&D project ma nagement, in particular uncer tainties linked to the ex ternal scientific

environment. Our f indings highli ght how these uncert ainties have an impact on the initiat ion

and discontinuat ion of R&D project s. We exami ne these effects in the context of shift s in US

science policy in the ce ll therapy field, using a data set on 570 R&D projects in t he global cel l

therapy sector, initiated over t he period 1986 –2011. We fi nd decreased R&D project initiation

rates and higher dis continuat ion rates for projects init iated by US firms in the af termath of

policy shif ts that increased uncertai nties about public fu nding supp ort for US cell t herapy

research. We also high light how this effect was reversed a s the US public funding outlook for

such research recovered.

Keywo rds: Cell therapy, human embryonic stem cel ls, R&D projects, real options, science

policy, technology mana gement

INTRODUCTION

Organised w ithin networks encompassing both academic institut ions and commercial

entities, the development of R&D projects in science-intensive industries such as t he bio-

technology industry feeds of f and is closely intertwined w ith publicly funded scientific re-

search (e.g., Cohen et al., 2002; Powell et al., 2005). Accordingly, public funding plays an

important role in upstream R& D in these industries. While venture c apital ists in Silicon

Valley, the US region with the largest amount of early stage fund ing for biotechnology

Journal of Man agement Studi es 56:5 July 2019

do i: 10 .1111/jo ms. 12423

Address for re prints: Simcha Jong , Faculty of Science, Leiden Univers ity, Science Based Business, Nie ls

Bohrweg 1, 2333 CA, L eiden, The Netherlands (s.jong@l iacs.leidenuniv.nl).

This is an op en access article under the t erms of the Creative Commons At tribution License, which pe r-

mits use, dis tribution and reproduction in a ny medium, provided the orig inal work is properly cited.

© 2018 The Authors.

Journal of Ma nagement Studies publ ished by Society for the Adv ancement of Managment St udies and John Wiley &

Sons, Ltd.

Public Funding for Science and the Value of Corporate R&D Projects 10 01

© 2018 The Authors.

Journal of Ma nagement Studies publ ished by Society for the Adv ancement of Managment St udies and John Wiley

& Sons, Ltd.

firm s, provided US$ 104 million in seed- and start-up- fu nding for biotechnology firms

in 2012 (PricewaterhouseCoopers, 2015), the National Institutes of Health (NI H) alone

distributed US$ 258 mil lion for biomedical researc h at the region’s three major research

universities in that sa me year. Moreover, NIH provided an additional US$ 41 mill ion of

funding to Sil icon Valley f irms through its Small Business I nnovation Research grant

scheme (National Institutes of Healt h, 2015a).

Given the central role of exter nal scientific communities in corporate R&D projects,

uncertainties relating to firms’ ability to rely on these communities as R&D projects

progress, likely shape firms’ management of these projects. The challenges these un-

certainties represent are substantial. Both the scientific knowhow a firm needs over the

course of an R&D project, and the new scientific knowhow that will become available

during that period, are often difficult to predict when a firm commits resources to a new

project.

One approach to understanding the management of uncertainties in a firm’s exter-

nal environment emanates from the finance literature on real options. Adopting a real

options approach entails conceptualising investments in R&D projects as investments in

a platform, which could enable, but does not oblige a firm to bring to the market new

products in a specific technological field in the future (Bowman and Hurry, 1993; Kim

and Kogut, 1996; McGrath and Nerkar, 2004; Oriani and Sobrero, 2008; Trigeorgis and

Reuer, 2017). However, existing real options approaches are often seen as overestimating

R&D project valuations as these mostly rely on assessments of uncertainties linked to

future revenue streams, and do not sufficiently take into account other important sources

of uncertainty (Van Putten and MacMillan, 2004). By focusing on uncertainties about a

firm’s external scientific environment, we expand the focus of this literature to the role of

uncertainties about critical input resources for R&D projects.

Specifically, we focus on uncertainties that are the result of changes in science policy.

Those involved in policy and regulation play an important role in shaping uncertainties

that a firm faces in its external environment (Fabrizio, 2013; Henisz, 2000; Henisz and

Williamson, 1999). In the case of R&D project investments, firms have for example been

found to strategically allocate R&D resources to minimize market uncertainties based on

different types of patent protection and regulatory approval requirements (Budish et al.,

2015; Olson and Yin, 2017), as well as publicly funded reimbursement schemes for new

products that R&D projects result in (Krieger et al., 2018).

We posit that science policies that increase funding uncertainties for scientific research

have detrimental effects for the development of corporate R&D projects. According

to the real options literature, a critical challenge for firms that consider irreversible,

non-transferable resource commitments to projects is to manage uncertainties about fu-

ture supplies of key input resources for these projects (Dixit and Pindyck, 1994; Kogut

and Kulatilaka, 2001; Pindyck, 1993). Firms tend to delay or avoid such commitments

as uncertainties increase about costs of project inputs (Dixit and Pindyck, 1994; Pindyck,

1993). Building on this insight we examine two effects of increased funding uncertainties

for public research, on firms’ management of resource commitments to R&D projects.

First, changes in the funding outlook for public research affect considerations underlying

the initiation of projects. The initiation of R&D projects in science-driven technological

1002 H. Huang and S. Jong

© 2018 The Authors.

Journal of Ma nagement Studies publ ished by Society for the Adv ancement of Managment St udies and John Wiley

& Sons, Ltd.

fields generally requires firms to make substantial upfront resource commitments that

are not transferable to other fields. To gain access to and use tacitly held scientific know-

how in specific fields, firms often set up internal corporate laboratories, as well as attract

researchers from, and forge collaborations with academic laboratories with expertise in

those fields (Cohen and Levinthal, 1990; Fabrizio, 2009; Fleming and Sorenson, 2004;

Jong, 2016; Liebeskind et al., 1996; Wong et al., 2015; Zucker et al., 1998). However, the

ability to redeploy those R&D resources across different fields is limited. For example, a

firm that recruits stem cell biologists from top academic laboratories to work on an R&D

project involving stem cells will in most cases face significant hurdles in redeploying those

scientists to projects involving small molecule- or protein- drugs. Therefore, we posit that

increased funding uncertainties for public research in a field will make it less attractive for

firms to make upfront resource commitments to new R&D projects in that field.

Second, changes in the funding outlook for public research in a field affect firms’ ability

to move R&D projects down the development pathway towards the market. Advancing

R&D projects in industries such as the biotechnology industry requires firms to forge col-

laborations across extensive interorganisational networks encompassing R&D partners,

academic institutions, professional services firms, investors, contract manufacturers, etc.

(Powell et al., 2005, 1996; Stuart et al., 2007). As new technological fields emerge, or-

ganisations across these networks face trade-offs about whether or not to make resource

commitments to these fields. We argue that making such commitments becomes less at-

tractive for all organisations across these networks when the funding outlook for scientific

research deteriorates, not only for those firms that take decisions about the initiation of

new R&D projects. This creates an additional hurdle for innovator firms that do decide

to commit resources to new R&D projects in a field with a negative public funding out-

look. It eventually makes it more difficult for these firms to find partners willing to com-

mit the additional resources needed to bring these projects to a successful completion.

We assess these effects in the context of the R&D landscape of the global cell therapy

sector following changes in US federal policies that restricted funding for research in-

volving human embryonic stem cells (hESC) during the first decade of the 21st centur y.

The global cell therapy sector finds its origins in the 1980s. However, the sector was

mostly focused on the commercialisation of therapies comprising of mature, specialised

cells directed at a relatively small number of therapeutic application areas with limited

market potential up until the dawn of the 21st centur y. This all changed with a series of

discoveries that allowed researchers to isolate hESCs and use these cells in drug discovery

during the late 1990s opening up a wider set of opportunities to develop new therapies

focused on pressing disease burdens in areas such as Alzheimer’s, Parkinson’s, diabetes,

cardiovascular-, and liver- disease. Thus, hESC research was seen as critical to the de-

velopment of the cell therapy sector during the first decade of the 21st century and US

federal restrictions on hESC research were seen as potentially undermining scientific

programs that were key for this sector (Mason and Manzotti, 2009; National Academies

of Sciences, Engineering, and Medicine, 2002).

To examine the impact of shifts in hESC funding policy on the initiation and ad-

vancement of corporate R&D projects in the cell therapy sector, we created a unique

dataset. It contains information on 868 worldwide deals involving the transfer of cell