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.