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Innovation, profitability and growth over the business cycle

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Recent debates about Industrial Policy are dominated by a concern to make firms “more innovative”. In order to make progress in assessing the magnitude of the effects of innovation on corporate performance, one needs to know how such effects occur. We have contrasted two views of the effect of innovation—“the product view” and “the process view”—and have provided some evidence to suggest that both effects are evident in the data. Although it is clear that individual innovations themselves have a positive effect on profitability and growth, it is equally clear that the process of innovation seems to transform firms in some way that gives rise to what look like generic differences between innovators and non-innovators. As a consequence, the process by which profitability and growth are generated differs noticeably between the two types of firms. Perhaps the clearest of these differences is that innovating firms seem to be much less sensitive to cyclical shocks than non-innovating firms are.

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We are obliged to the ESRC for support. Some of the work discussed here draws upon joint work with John Van Reenan, and we are obliged to him for his assistance and helpful comments. Jonathan Haskel also provided very helpful comments on an early draft of the paper. We are also obliged to seminar audiences at the University of Ulster, the University of Manchester, the National Institute of Economic and Social Research, NERA, UMIST, University College London, the Centre for Economic Performance at the LSE and the Industrial Organization Conference held at Vienna, June 24–26, 1992, for many stimulating observations. However, the usual disclaimer applies.

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Geroski, P.A., Machin, S. Innovation, profitability and growth over the business cycle. Empirica 20, 35–50 (1993).

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