of general and abstract knowledge in innovation. Technological advances based on genetic engineering and molecular biology have deeply affected the pharmaceutical industry. They have given great impetus to the possibility of understanding the "causes" of diseases and the action of drugs. Reliance upon random screening of compounds to find what may work is giving way to more selective and carefully structured experiments, guided by basic theory. As a result, now researchers can often design drugs on computers and "build" them in labs before extensive experimentation on animals and human beings.1

The biotechnology sector also provides a prototypical example of the changing patterns of specialization in inventive activity that we call the division of innovative labor. Historically, large pharmaceutical companies, which integrated activities from research to distribution, have been the primary source of innovation in the industry. The rise of biotechnology, along with a number of related economic forces, has made possible, and to a large extent forced, specialization and cooperation among large pharmaceutical firms and small, research-intensive, biotechnology enterprises. In this network of innovators, universities and research institutions occupy an important place as well.

The next section describes more fully the participants in the division of labor in biotechnology. The section following that discussion examines the different strategies of external linkages from the viewpoint of the large corporations and characterizes the relationship between these different strategies. We then analyze the factors that determine the value that a firm can derive from its external linkages, and the light throws upon the nature of division of innovative labor. The penultimate section discusses whether the division of innovative labor is socially desirable and the final section provides our conclusion.


Up to the 1980s, most new drugs stemmed from systematic investments in internal research and development (R&D) by large corporations (Thomas, 1988). Biotechnology has a "science-push" origin. The initial breakthroughs include the discovery of the double-helix structure of DNA in 1953 and the discovery of the new techniques of recombinant DNA (rDNA) and cell fusion (monoclonal antibodies) in the 1970s, all of which resulted from scientific research within the university system. In addition, there have been significant advances in molecular biology and related fields, such as computer imaging of molecules, which have greatly increased the understanding of the links between molecular structure and


We use biotechnology as a convenient short hand for the entire gamut of scientific and technological advances, including recombinant DNA techniques, hybridoma and PCR techniques, and the more fundamental advances in molecular biology, molecular genetics, and biochemistry.

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