FAIL OFTEN, FAIL BIG, AND FAIL FAST? LEARNING FROM SMALL FAILURES AND R&D PERFORMANCE IN THE PHARMACEUTICAL INDUSTRY

Do firms learn from their failed innovation attempts? Answering this question is important because failure is an integral part of exploratory learning. In this study, we consider whether and under what circumstances firms learn from their small failures in experimentation. Building on organizational learning literature, we examine the conditions under which prior failures influence firms' R&D output, in terms of amount and quality. Our empirical analysis of voluntary patent expirations (i.e., patents that firms give up by not paying renewal fees) in 97 pharmaceutical firms between 1980 and 2002 shows that the number, importance, and timing of small failures are associated with a decrease in R&D output (patent count) but an increase in the quality of the R&D output (forward citations to patents). Exploratory interviews further suggest that the results are driven by a multilevel learning process from failures in pharmaceutical R&D. Our findings contribute to the organizational learning literature by providing a nuanced view of learning from failures in experimentation.