New product introduction and product tenure: What effects on firm growth?

Abstract

This study contributes to the recent empirical literature on the innovation–firm performance relationship by investigating the effect of product introduction on firm growth in a sample of Italian firms from 2000 to 2006. We adopted a novel approach that exploits the interpretative content of the tenure of the last product introduced (i.e., the number of years since its first introduction) as an additional variable into the explanatory scheme of firm sales growth rate. This variable aims to capture peculiar characteristics of new goods, such as their novelty and complexity. The estimated results confirmed the relevance of this model specification and helps in understanding the reason why previous studies have failed to find a statistically robust relationship between product innovation and growth. Moreover, we found the following: first, the release of a new product enhances growth opportunity among multiproduct firms; second, product development promotes the growth of firms belonging to sectors with stronger commitment to research and development; and third, new product development enhances firm growth substantially in those sectors that absorb externally originated patents.

Introduction

Many theoretical articles have investigated the presence of links between firm performance (productivity or firm size growth) and product innovation (Klette and Griliches, 2000, Klette and Kortum, 2001, Klette and Kortum, 2004, Thompson, 2001, Lentz and Mortensen, 2005). Most of these articles have focused on extending the interpretative notion of the endogenous growth models of Grossman and Helpman (1991) and Aghion and Howitt (1992), which operate at a macro-level perspective, assuming heterogeneity across firm behaviors with regard to innovation propensity and research and development (R&D) investment. Earlier, other models approached the investigation of the relationship between research expenditure and firm performance on the basis of deterministic assumptions on innovation activity (Dasgupta, 1985, Phillips, 1971, Hopenhayn, 1992). They all reached conclusions that point to a positive correlation.

Besides, the “active learning” model, developed by Ericson and Pakes (1995) and Pakes and Ericson (1998), stresses the importance of learning by undertaking investments in innovative activities as a key determinant of firm dynamics. In this model, firms could modify their own level of efficiency over time by increasing their investments. This model is counterbalanced by the passive learning model of Jovanovic (1982), wherein firms that are endowed with a time-invariant relative efficiency, which they do not know ex-ante, learn about their true abilities, and their costs over time by entering the market and production. The most efficient firms survive and grow, whereas others shrink or exit from the market. Here, learning is time-driven and shows diminishing returns.

Finally, evolutionary theories (Nelson and Winter, 1982, Dosi, 1988, Dosi et al., 1995) suggest that firms with a strong commitment to R&D and learning activities experience a higher growth rate. They are more likely to develop a finer ability to innovate and exploit the results of their research activity in the product market. They acquire superior “absorptive capacity,” which is firm specific and not imitable, and can foster innovation opportunities (Cohen and Levinthal, 1990). Innovative activity provides an inexhaustible source of competitive advantage and, hence, long-lasting success.

The growing empirical literature that focuses on investigating the relationship between innovativeness and firm performance confirms the relevance of this topic (Hall, 1987, Evans, 1987a, Evans, 1987b, Amirkhalkhali and Mukhopadhyay, 1993, Doms et al., 1995, Liu et al., 1999, Nurmi, 2004, Lööf and Heshmati, 2006, Del Monte and Papagni, 2003, Yang and Huang, 2005). However, empirical investigation has concentrated more on the relationship between innovation inputs (R&D intensity and patenting indicators) rather than on innovation counting (object approach), such as the introduction of new products (Flor and Oltra, 2004, Becheikh et al., 2006, for a survey).

This study contributes to this strand of literature by investigating the effect of new product introduction on firm growth for a sample of Italian medium-sized companies from 2000 to 2006. We adopted a novel approach that exploits the interpretative content of the tenure of product, i.e., years passed since its launch into the market, in addition to the records of new product introduction. Firm innovative activity can be proxied by the release of a new product by the firm.²

However, we argue that this indicator alone cannot detect all the links among innovation and growth, especially in the case of multiproduct firms. Indeed, empirical analysis failed to find robust correlation when the analysis is carried out at the level of an individual firm and when the “counting object” approach is assumed (Becheikh et al., 2006). As an enhancement to the current literature, we introduced the market tenure of the latest introduced product as an additional variable into the explanatory scheme of growth rate of firm sales. This variable aims to capture peculiar characteristics of new goods, such as their novelty and complexity. The importance of better accounting for quality aspects in the measurement of innovative output has been widely acknowledged: mere algebraic count of new products spits out an incomplete picture of the innovative efforts of the firm (Tether, 1998, Lööf and Heshmati, 2006). To our knowledge, this variable has not been used in growth analysis at the firm level while, in a different setting, it has been shown that product tenure is a prevalent product characteristic that is strictly connected to firm productivity and strategic decision on the firm's own product portfolio (Bernard et al., 2008, Schott, 2011, Moral and Jaumandreu, 2007). Traditional models of firm growth restrict the analysis to one firm–one product. Starting with Jovanovic (1982), firm dynamics has been explained through firm heterogeneity as captured by the size and age of the firm. However, when we assume multiproduct firms, firm age and product age can vary greatly, and firm age is not sufficient for representing firm specificity. Therefore, accounting for product-specific characteristics, such as product tenure, can return a more complete model of firm dynamics.

As an additional element of originality, we carry out our analysis exploiting the panel dimension of a unique original Italian firm-level data set which collects information also at the firm-product level.

This article is organized as follows: Section 2 reviews the relevant literature, Section 3 describes the econometric specification of the corporate growth model adopted in the empirical analysis and the data, Section 4 presents the results and some robustness checks and, Section 5 presents the conclusions.