Are product and process innovations supermodular? Complementary returns to product and process innovations

Abstract

Most firms do not undertake innovation despite clear evidence that innovation is associated with performance. Of the firms that do innovate, the common forms of innovation are in products and services, suggesting a preference for outward market-facing innovation. Fewer firms engage in process innovations that may drive costs of production down. In this paper, we use the classic literature on strategic fit and complementarities and explicitly question whether conducting product and process innovations simultaneously allows firms to generate higher returns than conducting either in isolation. Using a longitudinal UK SME data set from 2015 to 2020, we find that product and process innovations are complements and that engaging in both at the same time increases employment growth by more than simply ‘adding-up’ the returns to doing innovative things in isolation. We then reflect on why only 5% of UK SMEs do both in parallel thus ignoring their supermodular properties.