Failures and Innovation: Evidence from Medical Device Recalls
Abstract: Medical technology firms seek to operate at the frontiers of innovation and new product development. When functioning properly, innovative medical devices can prolong and improve lives; when malfunctioning, the same devices can cause harm to patients, lead to product recalls by regulators, and disrupt status-quo operations by manufacturers. Medical device firms’ innovation efforts are therefore likely to be affected by product failures. Using 13 years of firm-level FDA data, this paper explores the effects of product recalls on new product submissions. Recalls vary by source (firm or rival), proximity (product area) and severity (classification), while product submissions vary based on technological sophistication and novelty. Recurrent-event hazard models are used to examine how recalls affect the hazard of major and minor innovation. The empirical results are informative: first, own-firm recalls decelerate and rival-firm recalls accelerate the rate of innovative activity; second, same product area recalls slow innovative activity more than different product area recalls; and third, severe recalls decelerate innovative activity more than non-severe recalls. The results suggest that product failures significantly influence firms’ subsequent innovation efforts, but these relationships are highly nuanced. The strategic and public policy implications that obtain from these findings are highlighted and discussed.