On the strategic accumulation of intangible assets

The resource-based view holds that firms can earn supranormal returns if and only if they have superior resources and those resources are protected by some form of isolating mechanism preventing their diffusion throughout industry. One isolating mechanism that has been proposed for intangible assets is their accumulation process. The hypothesis is that intangible assets are inherently inimitable because would-be imitators need to replicate the entire accumulation path to achieve the same resource position. Thus, entrants can never catch up to incumbents. An interesting challenge to this hypothesis is counterfactual evidence that entrants sometimes outperform incumbents. Such counterfactual evidence should not exist if the theory is strictly correct. This paper attempts to reconcile resource accumulation theory with the counterfactual evidence. We do so by building an intermediate good-production function for a firm's intangible asset stocks. We test the contribution of the intangible asset stock to the firm's final good-production function and examine the extent to which that asset stock deters rival mobility in the pharmaceutical industry. We find that the asset accumulation process itself cannot deter rivals, because asset stocks reach steady state rather quickly. Entrants can achieve an incumbent's intangible asset stock merely by matching its investment until steady state. Thus, we conclude that the accumulation process per se is not an isolating mechanism. While this is perhaps the most important contribution, another contribution is an empirical methodology for characterizing the accumulation function.