Joseph E. Coombs
David L. Deeds
Philadelphia, PA 19122
The relationship between the location of 102 biotechnology companies that went public between 1983 and 1992 and their level of level of research productivity and market value was studied. The research productivity of the firm was measured by the number of products in each firms' production pipeline while each firms' market value was measured as the product of the number of outstanding shares and the closing stock price. Firms' location characteristics included the percentage of all biotechnology firms located in an individual firm's statistical metropolitan area (SMA), the total dollar amount and number of National Institute of Health grants to universities within each firm's SMA, national rankings of medical schools and graduate science programs within each firm's SMA and the number of students graduating with Ph.D.s in scientific fields within each firm's SMA. The effect of firm location productivity and market value is indirect. Firm location variables are hypothesized to enhance the absorptive capacity of each firm which directly affects firm productivity and market value. A firm's absorptive capacity is an intangible resource which gives a firm an ability to recognize the value of information, assimilate it, and apply it commercially. More specifically, absorptive capacity allows the firm to better understand and therefore evaluate the importance of intermediate technological advances that provide signals as to the merit of new technological developments. Thus, in an uncertain environment, absorptive capacity affects expectation formation, permitting the firm to predict more accurately the nature and commercial potential of technological advances.
A sample of 102 biotechnology companies that went public between 1982 and 1993, from a total population of 225 biotechnology companies, was examined. The companies were those that responded to phone contacts requesting a prospectus. A structural equation model was developed to test the effect of location variables on the absorptive capacity of each firm. The effect of absorptive capacity on firm productivity and market value is then tested.
Preliminary findings suggest a significant relationship between firms' productivity and market vale and the firms' absorptive capacity. Firm market value is also positively related to firm productivity.
When trying to maximize the value of a newly public biotechnology firm, managers need to pay careful attention to the location of the firm. Locational factors do appear to enhance the absorptive capacity of biotechnology firms which in turn enhances both the firm's research productivity and market value.