Long-Term R&D Impact of Human Capital Investments: An Examination of the Pharmaceutical Industry

Project: Research

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Description

The negative economic effects of the ongoing COVID-19 pandemic have increased and thus highlighted the challenges of world-wide pharmaceutical drug development. Since 2008, institutional investments in the pharmaceutical sector have declined, stagnating the growth of long-term R&D expenditures globally. Recent studies point to costly external financing for the paucity of breakthrough drugs but fall short in identifying potential investment channels through which financing can facilitate novel drug discovery. Our project serves to fill this gap by exploring the human capital channel and determining whether investments in skilled labor are critical in the success of drug development for pharmaceutical companies. Long-term R&D is a risky endeavor as it often involves multiple stages of investments that not only span several years, but also have a high chance of failure. Corporate investments in long-term R&D typically necessitate the selective hiring and intensive training of high-skilled workers. Understanding how the employment of high-skilled workers affect the performance of long-term R&D informs policymakers of whether human capital investments are effective in creating breakthrough innovation. Drug development is a natural environment to study the performance of long-term R&D as the progress of each drug is observed through its clinical trial phase transitions, which in totality, may last over a decade before the drug reaches market. Unlike other studies which use firm investment aggregate data gathered from public financial statements, our study uses drug development data which allows us to look inside a "black box" of firm decision making at the product level. We seek to determine whether human capital investments play a role in (1) novel drug discovery, which we measure based on drug chemical structure similarity to other drugs in a firm's development pipeline, and (2) reducing drug attrition rates within clinical trials. We conduct two natural experiments: one based on random lotteries that the United States Citizenship and Immigration Services uses to allocate H-1B visas and the other based on a policy shock to the overall supply of skilled foreign labor through the H-1B program in our assessment process. We estimate the impact of shortages in highskilled foreign labor (e.g., statisticians, biochemists, engineers, scientists, physicians, etc.) on drug development for U.S. pharmaceutical companies. Our goal is to establish empirically a human capital investment channel in long-term product development. 

Detail(s)

Project number9043233
Grant typeGRF
StatusNot started
Effective start/end date1/01/22 → …