Abstract
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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Cohen, W. and R. Levin (1989) ‘Empirical Studies of Innovation and Market Structure’, in Schmalensee, R. and R. Willig (eds.),Handbook of Industrial Economics, Amsterdam: North Holland.
Cohen, W. and D. Levinthal (1989) ‘Innovation and Learning: The Two Faces of R&D’,Economic Journal 99, 569–596.
Edwards, J., J. Kay and C. Mayer (1987)The Economic Analysis of Accounting Profitability, Oxford: Oxford University Press.
Fisher, F. and J. McGowan (1983) ‘On the Misuse of Accounting Rates of Return to Infer Monopoly Profits’,American Economic Review 73, 82–97.
Fisher, F. (1987) ‘On the Misuse of the Profits-Sales Ratio to Infer Monopoly Power’,Rand Journal of Economics 18, 384–397.
Geroski, P., S. Machin and J. Van Reenan (1991) ‘The Profitability of Innovating Firms’, mimeo, London Business School.
Geroski, P. and S. Machin (1992) ‘The Dynamics of Corporate Growth’, Mimeo, London Business School.
Geroski, P. (1991) ‘Innovation and the Sectoral Sources of UK Productivity Growth’,Economic Journal 101, 1438–1451.
Geroski, P. (1992) ‘Technology and Markets’, forthcoming in Stoneman, P. (ed.),Handbook of the Economics of Innovation and Technical Change, Oxford: Basil Blackwell.
Geroski, P. and A. Jacquemin (1988) ‘The Persistence of Profits: An International Comparison’,Economic Journal 98, 375–390.
Hall, B. (1987) ‘The Relationship between Firm Size and Firm Growth in the US Manufacturing Sector’,Journal of Industrial Economics 35, 583–606.
Kwoka, J. and D. Ravenscraft (1986) ‘Cooperation vs. Rivalry: Price-cost Margins by Line of Business’,Economica 53, 351–63.
Machin, S. and Van Reenan (1992) ‘Profit Margins and the Business Cycle: Evidence from UK manufacturing Firms’, forthcoming,Journal of Industrial Economics.
Mowery, D. and N. Rosenberg (1989)Technology and the Pursuit of Economic Growth, Cambridge: Cambridge University Press.
Mueller, D. (ed.) (1990)The Dynamics of Company Profits, Cambridge: Cambridge University Press.
Mueller, D. (1986)Profits in the Long Run, Cambridge: Cambridge University Press.
Mueller, D. (1987)The Corporation: Growth, Diversification and Merger, London: Harwood Academic Publishers.
Odagiri, H. (1992)Growth Through Competition, Competition Through Growth, Oxford: Oxford University Press.
Pavitt, K. (1991) ‘Key Characteristics of the Large Innovating Firm’,British Journal of Management 2, 41–50.
Willman, P. (1991) ‘Bureaucracy, Innovation and Appropriability’, mimeo, London Business School.
Author information
Authors and Affiliations
Additional information
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.
Rights and permissions
About this article
Cite this article
Geroski, P.A., Machin, S. Innovation, profitability and growth over the business cycle. Empirica 20, 35–50 (1993). https://doi.org/10.1007/BF01384139
Issue Date:
DOI: https://doi.org/10.1007/BF01384139