Divestitures and New Product Development: Evidence from the Pharmaceutical Industry

Abstract

We examine how divestitures influence improvements in a firm’s resource base, as indicated by new product development. Because improvements in firms’ resource bases depend upon available managerial capacity, divestitures that release greater managerial capacity should drive greater improvements in the resource base of any given firm. We find that majority divestitures—in which firms relinquish ownership of a previously managed unit—relative to minority divestitures—in which ownership is retained—are associated with meaningful increases in new product development. Results are stronger for firms with higher levels of R&D spending, which are likely to possess the technological expertise to redeploy managerial capacity towards developing new products, and for late-stage products, which require additional managerial capacity. These findings highlight divestitures as a tool for resource reconfiguration and strategic renewal.

Keywords: Knowledge, Divestiture, Product Portfolio, Resource Reconfiguration, Corporate Strategy