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R&D Portfolio Strategy, Diversification and Performance: An Information Perspective

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. ABSTRACT A critical element of a firm's technology strategy concerns the allocation of R&D resources across distinct technologies and product markets. Yet, beyond the idea of economies of scope, there is little predictive theory about how the extent and specific directions of R&D diversification may influence R&D performance. In this paper, we take an information-based approach to the problem. Following others, we view R&D as an information-processing activity geared toward technical problem-solving and R&D capabilities as residing in the firm's specific information-processing routines. We define relatedness of R&D fields in terms of similarities or differences in information processing problems faced by decision-makers in the firm. Projects with similar information processing problems are characterized as being within the same " information regime. " Using project-level data from the pharmaceutical industry, we explore two questions: 1) Do firms tend to focus their R&D activities within similar information regimes? 2) Are there performance benefits of such focus? We find evidence that firms diversify their R&D projects portfolios across different information regimes. We also find that there are performance costs of such diversification.