The Profitability of Innovating Firms

TLDR

The study evaluates how major innovations affect corporate profitability. The authors distinguish direct, short‑term profitability gains from new products or processes and indirect gains from enhanced internal capabilities that signal innovation. Direct profitability gains of about £2.1 million over seven years were observed, while indirect gains—larger by up to three times—stem from spillovers and resilience to macro shocks.

Abstract

This article seeks to evaluate the effects on corporate profitability of producing a major innovation. We examine two types of effect: innovations can have a direct but transitory effect on profitability associated with the production of a new product or the use of a new process, and innovations can have an indirect effect on how firms generate profits because they signal the transformation of a firm's internal capabilities associated with the process of innovating. Positive direct effects on the order of [[sterling]]2.1 million spread over seven years are observed for a sample of 721 large, quoted U.K. firms. More fundamentally, large indirect effects are also observed, not least because innovating firms seem to be more able to benefit from spillovers and are relatively insensitive to adverse macroeconomic shocks. These indirect effects associated with the transformation of a firm's internal capabilities may be as much as three times larger than the direct effects of innovation.