The role of intellectual capital in new product development: Can it become a liability?

• Published date: 01 September 2019
• Author: Vareska van de Vrande,Annapoornima M. Subramanian
• Date: 01 September 2019
• DOI: http://doi.org/10.1002/joom.1045

RESEARCH ARTICLE

The role of intellectual capital in new product development:

Can it become a liability?

Annapoornima M. Subramanian

1†

| Vareska van de Vrande

2†

1

Industrial Systems Engineering &

Management, National University of

Singapore, Faculty of Engineering,

Singapore

2

Department of Strategic Management &

Entrepreneurship, Rotterdam School of

Management, Erasmus University

Rotterdam, The Netherlands

Correspondence

Annapoornima M. Subramanian, Industrial

Systems Engineering & Management,

National University of Singapore, Faculty of

Engineering, Block E1A, #06-25,

1 Engineering Drive 2, 117576, Singapore.

Email: isemsa@nus.edu.sg

Funding information

National University of Singapore Research

Grant, Grant/Award Number: NUS

(R-535-000-008-112)

Handling Editor: Gregory Heim

ABSTRACT

Given the increasingly high cost of new product development (NPD), it is important

for firms to terminate unsuccessful NPD projects as soon as possible. This article

investigates the role of intellectual capital in the discontinuation of NPD projects.

The three dimensions of intellectual capital (human, structural, and social capital) are

posited to decrease the likelihood of discontinuation of NPD projects, while contex-

tual factors such as the firm's discontinuation experience and the size of the drug

development portfolio are expected to affect this relationship. The research model is

tested using a unique data set of 1,168 drug discovery and development projects.

The results suggest that NPD projects rich in all three dimensions of intellectual capi-

tal are less likely to be discontinued. The size of the firm's drug development portfo-

lio, however, is found to mitigate these effects, while discontinuation experience

enhances the relationship between intellectual capital and discontinuation duration.

As only a fraction of new product development initiatives result in success, timely

discontinuation of unsuccessful projects is critical for sustained performance of

organizations. Our findings make an important contribution to this stream of work.

By highlighting the roleof intellectual capital in the discontinuation process, we offer

an interesting twist to the literature that invariably assumes intellectual capital to be

important for innovation.

KEYWORDS

discontinuation duration, intellectual capital, new product development

1|INTRODUCTION

The development of new products and services is at the heart

of the sustained performance of many successful organiza-

tions. However, new product development (NPD) trajectories

are costly and fraught with risks. Due to the everincreasing

cost of the NPD process, it is important to eliminate failure

as soon as possible (Urban and Hauser, 1993), as early ter-

mination of unsuccessful projects will help keep costs low.

Nevertheless, project teams have been found to continue

NPD projects even when the available data suggest that the

project is likely to fail (Schmidt and Calantone, 1998).

Prior research posits that this tendency to become locked

into a chosen course of action is rooted in intellectual capi-

tal, such as human, structural, and social capital (Staw and

Ross, 1987). This observation creates an interesting ten-

sion, as intellectual capital is commonly perceived as an

important driver of innovation success (Subramaniam and

Youndt, 2005). Although the importance of intellectual

capital for successful NPD is well established in the litera-

ture, we know little about its negative consequences and

how they can be mitigated. This article aims to address this

research gap.

†

Authors contributed equally. Authorship listed alphabetically.

Received: 22 May 2018 Revised: 23 April 2019 Accepted: 24 April 2019

DOI: 10.1002/joom.1045

J Oper Manag. 2019;65:517–535. wileyonlinelibrary.com/journal/joom © 2019 Association for Supply Chain Management, Inc. 517

Prior research has identified a broad range of success

factors of NPD projects, ranging from using a formal

approach, to having a specific strategy, to closing NPD pro-

jects with completion dinners (Barczak et al., 2009; Cooper

and Kleinschmidt, 1995). However, some of the success fac-

tors behind innovation and NPD can inadvertently lead to

negative outcomes. For example, while collaboration with

external partners, such as strategic alliances, has been found

to enhance innovation and NPD performance (Brettel and

Cleven, 2011), such relationships also can trigger cost-

increasing side effects (Faems et al., 2010). Similarly, top

management support is crucial to secure the necessary funds

and resources (Cooper and Kleinschmidt, 1995), but it can

lead to escalation of commitment (Green et al., 2003).

Another important factor to consider in NPD projects is

intellectual capital. Intellectual capital encompasses the

“sum of all knowledge firms utilize for competitive advan-

tage”(Subramaniam & Youndt, 2005:451) and includes

human, structural, and social capital. Prior studies have indi-

cated the importance of intellectual capital in explaining the

innovative capabilities of organizations, as a critical portion

of the knowledge and skills required for innovation resides

with and is used by individuals (Almeida et al., 2011; Mer-

ton, 1973; Nelson, 2003; Noyons et al., 1994; Subramaniam

and Youndt, 2005; Subramanian et al., 2013; Zucker et al.,

2002; Zucker et al., 1998). Although the positive effects of

intellectual capital are indisputable, there are also negative

consequences. Drawing on the escalation of commitment lit-

erature, we argue that intellectual capital can become a liabil-

ity because it increases the tendency to escalate commitment.

As a result, NPD projects rich in intellectual capital are less

likely to be discontinued.

Given the importance of timely termination of unsuccess-

ful projects, we focus on contextual factors that could miti-

gate the relationship between intellectual capital and

likelihood of discontinuation. One way to overcome escala-

tion of commitment is through systematic exploration of

alternatives (Simonson and Staw, 1992). In the innovation

context, these alternatives may take the form of other NPD

projects competing for time and resources within the organi-

zation. We also consider the role of failure experience. Prior

experience with project failure may create a culture that is

tolerant of failure and also help with recognizing failing pro-

jects early on.

To test our hypotheses, we use a unique data set focusing

on the innovation-intensive biotechnology and pharmaceutical

industry (particularly the drug discovery and development pro-

jects), where intellectual capital is of key significance. Drug

discovery and development is highly regulated and follows a

series of well-defined steps. All pharmaceutical and biotech-

nology companies go through standard drug development

stages, and the results of each stage are public knowledge.

Decision-making surrounding the drug discovery and

development process is particularly important due to the

lengthy processes, high R&D expenditure, high failure

rates, and decreasing US Food and Drug Administration

(FDA) approval (Ikeda and Takeoka, 2018). Our sample

includes information on all drug development projects

successfully launched or discontinued during the period

1990–2017.

The current article makes two main contributions to the

literature on new product development and project termina-

tion and discontinuation. First, intellectual capital has been

highlighted in prior studies as an important driver of innova-

tion and firm performance (Nahapiet and Goshal, 1998;

Subramaniam and Youndt, 2005). We offer an alternative

view of the role of intellectual capital in innovation processes

by showing how it can become a liability and decrease

the likelihood that an NPD project will be discontinued.

We further suggest that these effects are exacerbated when

a company has more discontinuation experience. We then

show that it is important to invest in a portfolio of NPD

projects in order to minimize the possible negative conse-

quences of intellectual capital.

Second, we extend the literature by empirically testing the

relationship between intellectual capital and the likelihood of

project discontinuation. While the discontinuation of new

product development trajectories has received extensive atten-

tion, only a few studies have used actual NPD project data.

Two exceptions are Green et al. (2003), who found that pro-

jects were less likely to be terminated when they enjoyed

greater levels of man agement advocacy, and S hepherd et al.

(2014), whose study reveals the complex dynamics around

project termination timing—showing both positive and nega-

tive consequence of delayed termination. Nevertheless, most

studies on project termination have been experimental

(e.g., Behrens and Ernst, 2014; Biyalogorsky et al., 2006;

Boulding et al., 1997; Eliëns et al., 2018; McNally et al.,

2013; Schmidt and Calantone, 1998). Using a unique data set

on drug development, we aim to fillthis void.

2|THEORY AND HYPOTHESES

Given the high costs of new product development trajecto-

ries, timely discontinuation of NPD projects that do not meet

expectations is crucial. The decision to discontinue a project

is often made by a committee that decides on a portfolio of

R&D projects. Prior studies have highlighted the importance

of decision-making rules, for example, a stage-gate approach

(Cooper, 1990), where projects move through the develop-

ment funnel and each stage is concluded with a gate review

where a decision is made whether to continue or terminate

the project. Other researchers have stressed the importance

of clear stopping rules or decision decoupling where the

518 SUBRAMANIAN AND VAN DE VRANDE