Understanding the Relationship between Divestitures and Innovation: The Moderating Role of Organization Design

John Eklund, USC Marshall, and Emilie Feldman, Management, The Wharton School

Abstract: This paper investigates a tradeoff that may exist between the quantity and quality of innovation outcomes in divesting firms, as moderated by their organization designs. On one hand, divesting firms would be expected to produce fewer inventions after undertaking divestitures due to the knowledge loss that these transactions may entail. On the other hand, divesting firms would be expected to produce more original inventions and to progress a greater proportion of those inventions into development after undertaking divestitures due to the knowledge recombination and resource reallocation benefits of these transactions. These two innovation benefits of divestitures should be lower for firms with decentralized rather than centralized Research and Development (R&D) units. We find support for these arguments in the context of the global pharmaceutical industry.

Read the full working paper here (PDF).