Beyond Success: The Impact of Innovation Failures and Coping Strategies in the Medical Device Industry

This study examines the impact of medical device (MD) recalls—a form of product failure—on firms’ subsequent innovation and product development. Using a novel dataset of approved medical devices and recalls from the Food and Drug Administration (FDA) in the United States from 2002 to 2021, complemented by firm- and patent-level data, we examine how firms adjust their strategic behavior in response to recalls. To this end, we construct a concordance table linking the product classes used by the FDA to the International Patent Classification (IPC) system. Our findings indicate that recalls lead to a notable decline in innovation and product development within the recalled product class. Furthermore, we find that firms’ degree of product diversification plays a positive moderating role in mitigating these negative effects. These results underscore the nuanced relationship between product failures and innovation and highlight the role of product diversification in enhancing firm resilience.