On Profit Differentials Between Persistent and Occasional Innovators: New Evidences from a Random-Coefficient Treatment Model

Abstract

The paper studies the medium-term effect of being a persistent (occasional) innovator on firm economic return within a “counterfactual” setting using a random-coefficient model. This approach allows us to assess not only the point effect of a persistent/occasional innovation strategy on profitability, as in standard regression settings, but the “entire distribution” of it. We exploit a 9 years (1998–2006) longitudinal dataset of Italian manufacturing firms obtained by a merging of the last three waves of the Capitalia/Unicredit survey (eighth, ninth and tenth survey).

Results show a strong better economic performance of the group of firms that continuously implement their innovating capacity and output. Also occasional innovation produces good operating profit margin (OPM) differentials, although we estimate a difference with the persistent behavior of about three (percentage) points lower. Differences between occasional and persistent innovators are also enlightened at a dynamic level: we found that persistent innovation allows for a dynamic advantage against occasional “first-time-only” innovative strategy. Moreover, the analysis of the idiosyncratic distribution of the effect, based on the random-coefficient model, allows us to inspect what factors lead to be persistent innovators and we identify the “best performers” among them. These champions are characterized by a large stock of accumulated knowledge, a large size and operate in more concentrated markets. This result confirms what we have found in the literature on innovation persistence: dynamic capability building can be found mainly when a mechanism of increasing returns to scale is operating and this is mainly present in few leading companies.

13th Conference of the International Joseph A. Schumpeter Society, “Innovation, Organisation, Sustainability and Crises”, Aalborg University, Denmark, 21–24 June 2010.