The impact of regulatory review time on incremental and radical innovation: evidence from the high-risk medical device market

We theoretically and empirically study the effect of variation in regulatory review time on firms’ choices between radical and incremental innovations. We differentiate between entry into new segments (the extensive margin) and increasing the number of innovations in a given sector (the intensive margin). Our theoretical investigation indicates additional entry into medical device segments as a result of shorter application review times. It also predicts firm-level substitution effect, suggesting firms shift their R&D to innovation applications with relatively shorter review times. To test the theoretical predictions, we utilize a unique data set from the U.S. Food and Drug Administration that contains all product market approvals in the high-risk medical device market for the 1978–2007 period. The empirical results generally support our theoretical predictions. However, the results also show that firms are more responsive to changes in the review time for incremental applications compared to radical ones.