Innovation and financial performance of Brazilian companies : a statistical study for the period of 2009 to 2013

We look at innovation returns in two groups of companies located in Brazil. One group includes innovative companies, referred to as 3i companies (Innoscience Innovation Index) and listed in the São Paulo Stock Exchange – BOVESPA. The other group is referred to as Not-3i companies and are also listed in Sao Paulo’s BOVESPA. We first made a descriptive analysis and then a regression on performance indicators – net margin, asset profitability, and return on equity and on invested capital – with data from companies classified as 3i and Not-3i in the Economatica Report, limited to the period between 2009 to 2013. Results indicate that significant correlation appears between innovation and returns on invested capital, on equity, and on assets for 3i companies, as hypothetically projected. Net margin, however, is lower for 3i than for Not-3i companies, showing that lower gains in 3i companies may be due to higher costs of internal innovation.


Introduction
The relationship between innovation and business performance has become lately a growing field of research. Considering the concept of innovation synthesized in Barbieri and Álvares (2003) as the result of the implementation of an idea yielding positive economic results, empirical studies of this relationship, as well as the respective research methodologies, have multiplied in academia (SLOW, 1957). In general, they involve several quantitative and qualitative studies targeted at consolidating the truthfulness of results, that is, innovation as a business profitability increaser and a satisfier of consumer needs. Innovation has become, then, a basic factor for increasing the performance of companies (BRITO et al., 2009) and a relevant strategic tool to face economic, organizational, and social dilemmas (SILVEIRA;OLIVEIRA, 2013).
In spite of the conceptual logic of that relationship, empirical findings of research by Brito et al. (2009) are still not conclusive. They indicate that, thinking rationally, innovation endeavors tend to affect the growth of companies; however, empirical evidence does not consistently support this relationship. One reason could be the difficulty in measuring innovation as a singular cause of a firm's performance. Though many distinct factors may simultaneously be influencing performance, it is hard to ascertain that a positive performance results solely from innovation. To argue against this, however, expert literature shows a direct and positive relationship between innovation and the performance of firms, as in the study by Cho and Puick (2005)  In addition, many recent quantitative and qualitative studies simply attempt to confirm the truth of results. In any case, however, innovation is unquestionably a key factor in the performance of companies.
Research evidences raise the question of whether innovation is a necessary but neutral inducer (since, depending on how it is used, it can be positive or not), or if innovation has become a necessary inducing tool for firms' performance.
This study seeks to analyze the influence of innovation on the performance of firms by demonstrating, in a comparative sample of 3i and Not-3i companies its positive influence on their financial performance, in a selected time period.
Methodologically, we searched for information on performance indicators during the period of 2009 to 2013 and did a trend analysis on selected indicators: net margin, asset profitability, equity profitability, and return on invested capital.
Additionally, we did a regression analysis using a dummy variable, attributing value "1" to innovative firms and "0" to non-innovative firms. As a result, we were able to infer influence of innovation on the performance of firms with statistical positive betas.

Literature review
The concept of innovation has been studied from distinct perspectives in recent years. It seems that the majority of researchers agree on the economic nature of innovation; that is, improving something in design, basic operating functions, process, or applicability must demonstrate market acceptance, by capturing value in the market.
However, its definition holds another internal ingredient, that is, value generation. In economic terms, internal ingredient refers to cost-effectiveness, and market acceptance refers to financial returns. Stressing one path or another depends on the momentum and the economic operating context of the firm, where innovation is essential to reach and maintain competitive advantage.

Most expert literature in innovation deals
with the object or the format of innovation with an internal look at the ingredients of innovation. Bessant and Tidd (2007), for instance, look at the object of innovation when classifying innovation in product, process, position, or paradigm. Henderson and Clark (2005), on the other hand, leading the current trend of conceptualizing innovation as the process of creating improvement (incremental, radical, modular, and architectural), emphasize the format of innovation.
Innovation concepts in the Oslo Manual (1997) stress market value capture. Firms innovate when they develop and implement improvements on existing products and processes or create new ones. Of course, creation of or improvements in products/processes by a company are intended to capture market value. Barbieri and Álvares (2003) are more explicit, understanding innovation as the result of the implementation of an idea with positive economic results.
An innovative firm, according to Tidd, Bessant, and Pavitt (1997), involves more than a social structure. It involves several integrated components that work together to create and reinforce the adequate environment to generate innovation. For the authors, innovative firms retain ten features that are crucial to achieve higher performance: shared vision and leadership; adequate infrastructure; key individuals; effective working groups; permanent individual development; ample communication; higher involvement with innovation; client focus; creative environments; and organizational learning. An innovative firm, as per the Oslo Manual (1997), is characterized as an organization that has developed innovative strategies and implanted products and processes, management models, marketing and business models, or even a combination of these.

Competitive advantage
Innovation is always connected to competitive advantage in companies. However, competitive advantage results from several factors, some of them deriving from internal elements or internal arrangements (BARNEY, 1991) and some of them resulting from adaptability to market forces (PORTER, 1989). Recent theories on organizational ambidexterity (BIRKINSHAW; GIBSON, 2004) and technological resilience (REINMOELLER; BARDWIJCK, 2005) broach once again the same concepts seen in Barney (1996) and Porter (1989). Ambidexterity theory, in fact, represents better the same concepts On the other hand, Barney (1996) advocates that companies with valuable, rare, inimitable, and irreplaceable resources may obtain competitive advantage. Resilience theory amplifies this concept pointing out that the expanding technological domain and the development of innovation capabilities, for instance, would allow companies to maintain competitive advantage unaltered when facing pressures from competitive environ-ments or external scenarios, affecting their competitive abilities.
One of the first to note the relationship between innovation and competitive advantage, however, was Schumpeter (1985), who noticed that innovations keep the capitalist system "alive".
Schumpeter points out that innovation nurtures the creation of new technological, managerial, and market paradigms responsible for changes in the competitiveness of companies. In the same stream, Hurley and Hunt (1998) postulated that companies holding abilities to innovate also develop competitive advantage leading to higher levels of market share and financial performance. Evolving from the pure concept of strategy, Porter (1999), seconded by Besanko et al. (2000), recognizes that companies can reach competitive advantage through innovation, that is, by means of applying new technologies and new ways of doing things.
In recent years, innovation has been coupled with sustainability of competitiveness (TAKAHASHI, 2007). In other words, innovation became critical to guarantee a sustainable advantage for competitiveness. Results of research by Tomé et al. (2013), for instance, lead to conclusions on sustainability of competitive advantage when distinct areas of the business other than research and development (R&D), such as marketing, production, finance, and human resources enter the stage for innovation.

Innovation and performance
As time and knowledge evolved starting from Schumpeter's (1985) first ideas on functionality of innovation for business and companies themselves, as stated earlier, distinct approaches were adopted in the literature to point out or prove the influence of innovation on business. The first ideas were on ability of innovation of self-renewal -old technologies would be replaced be new ones.
Then came the influence of innovation on business competitiveness, replacing the understanding that strategies were sufficient to compete, by creating ambidexterity and resilience in organizations.
And in a third stage, we see innovation becoming fundamental for sustaining the competitive advantage of businesses.
In spite of being intuitive, looking at the influence of innovation on business performance, more specifically financial, is even more recent. In the 90's decade, Neely et al. (1995) recognized innovation as key to business performance. Peteraf (2003) expands this concept and sees innovation as a resource. Since performance results from the excellence of resources management, so it is for innovation. That is, the better innovation is managed, the greater its positive influence on business performance. Under this perspective, Hu (2003) conceives innovation in terms of its functionality for business profitability; that is, innovation en- Investments in R&D and its business significance for the growth of companies has been identified and analyzed by Hall (1987) in a sample of public manufacturing companies in the United States, showing that companies with R&D grew bigger than companies without R&D programs or departments.
Profitability deriving from innovation, however, is not evident in any industrial sector.
For instance, in a study of companies from the Brazilian chemical sector, two hypotheses were tested: (1) the greater the investment in innovation, the greater will expected business profitability be; and (2) the greater the investment in innovation, the greater will net revenue be. Statistical analysis, however, did not allow the authors to demonstrate correlation between investment in innovation and greater profits. Also, data from Amaral and Lima (2011) show no correlation between innovation and profitability. In another study, Silveira and Oliveira (2013) looked at possible correlations between sales, net margin, and patents. Considering the dependence relationship between net margin and profit, results show that investments in innovation are inconclusive with respect to profitability.
Finally, returns on innovation, in spite of being rationally acceptable, seem not to be immediate, or short run. On the same premises, Cruz (2010) proves through his research that, in fact, there are returns from R&D endeavors and direct investments, but only in the medium and long run.
One can imagine, however, that it's hard to separate contributions from corporate strategies not related to innovation from returns coming from investments originating solely in innovation.

Hypothesis
The relationship between innovation and financial performance is a growing research field in academia. According to Slow (1957)

Method
We evaluated the influence of innovation on performance of firms first through a descriptive analysis of the selected performance indicators (net margin; asset profitability; return on equity; and return on invested capital) of companies clas-sified as 3i, compared to companies not classified as 3i. Following this, we did a regression analysis, using a dummy variable, applying the value "1" to 3i companies and "0" to the others. The regression analysis aimed to verify whether 3i-classified companies would be affected in performance differently from those not classified as 3i. The regres-

Variables
Companies seek profit maximization and increased economic value. Therefore, financial  Based on Table 1 data, we tried to establish a correlation between 3i and Not-3i companies.
Correlation analysis relies on two variable, "X" and "Y", and characterizes the association between both. Once the correlation is determined, it is possible to characterize the relationship, as force and direction (Cooper and Schindler, 2001), coming from the results of innovation on a company's performance.

Results and discussion
To establish the correlation between innovation and performance indicators among selected companies (3i and Not-3i companies), we first did a macro descriptive analysis and introduced, as explained in the Method section, a dummy variable to differentiate between both in the matrix.
We express returns using percentages for the performance of 3i and Not-3i companies. Thus, the descriptive analysis, shown in Table 2, represents the percentages of average financial performance of the indicators, in terms of returns, in each of the two groups of companies. One can see that performance indicators of 3i companies present average returns in the range of 1.7% to 4.7% higher than Not-3i companies, except for Net Margin (ROS).
In Table 2, returns on equity (ROE) present numerically the higher percentage among all indicators. This higher percentage may come from the accumulation of patent value in a company's equity. Despite the differences in number, ROI, ROE, and ROA are all positive and higher for 3i companies than for Not-3i companies, proving in some way that market acceptance of 3i companies' products is better than that for Not-3i companies.
However, the same Table (2) of statistical results shows that return on investments (capital investment) presents the highest difference, that is, the highest range of difference on returns (difference of 4.7%) between 3i and Not-3i companies. On the other hand, ROS, expressing net margin, is the only financial performance indicator with higher returns for Not-3i companies. It shows an inverted difference on performance for the five-year period evaluated. We may guess that, at the very least, Not-3i companies practice a very different price policy compared to 3i companies, focusing on gains in production cost, and much less on the appeal of innovation.
Comparative analysis, however, is just a macro view of the picture. To evaluate influence of innovation on financial performance of companies, we need to establish also the correlation, if there is any, between financial performance indicators and innovation for the two groups of companies.
So, we did a correlation analysis between innovation and the selected financial performance indicators for each year in the five-year period. Table   3 shows that the highest correlation between innovation and financial performance indicators is the return on capital investments. This correlation confirms ROI as having the highest average differ- Return on equity (ROE) 172 Return on assets (ROA) 184 Net margin (ROS) 167 ence for the returns that were analyzed, as shown above in    Generically, therefore, these results agree with research results of Santos et al. (2010), where innovation holds a positive influence on the financial performance of Brazilian companies.
Regarding the correlation between innovation and financial performance indicators of 3i and Not-3i companies, we conclude that a significant correlation appears only between innovation and Return on Investment (ROI) in the five-year period evaluated. For this financial indicator, not only did p prove to be significant due to it being lower than .05, but Beta was also positive for all evaluated years (except for the year of 2009, whose untypical behavior is explained above), confirming a real correlation between innovation and ROI. In