What Determines Firm Boundaries in Biotech?

Abstract

Walter W. Powell [1996] gives us a fascinating and insightful description of complex industry. His central theme is that, in contrast to the old-line pharma- ceutical industry, which is dominated by a small number of large firms that are relatively self-sufficient, the biotechnology industry is populated with a large number of small firms that collaborate with each other extensively and intimately. This pattern presents two broad questions for organizational theorists. First, what determines firm boundaries? In particular, why is there so much less vertical and horizontal integration in the new biotechnology industry than the old-line pharmaceutical industry? Second, what is the nature of the contractual relationships between the many firms in this industry? Powell addresses both of these questions, but gives principal emphasis to the second. As to the first question - what determines firm boundaries? - Powell offers some intriguing observations but engages in little explicit theorizing. In my comments I shall reverse the emphasis, focusing principally on the determinants of the size and scope of firms. Of course, the two questions are closely related. In particular, the ability to adapt institutions from academic biology as mechanisms for managing interfirm contracting apparently contributes to the viability of small firms in biotech.