Innovation is a trial and error process in which both successes and failures contribute to knowledge creation and destruction. In this paper we test theoretical predictions about the role of failures in new product development on private and public knowledge and interfirm knowledge transfer. We analyse the outcomes of world-wide R&D projects in the pharmaceutical industry, and proxy knowledge flows with forward citations received by patents associated with each project. We find that patents covering successfully completed projects (i.e., leading to drug launch on the market) receive more citations than those associated to failed (terminated) projects, which in turn are cited more often than patents lacking clinical or preclinical information. Failures by specialized firms are cited more frequently than the ones of generalist companies. We therefore offer evidence of the value of failures as research inputs in (pharmaceutical) innovation.
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