Innovation and firm performance

Abstract

Innovation is considered the main contributor to economic development in advanced economies, as well as being a key factor in the social and cultural evolution. Besides, increasing levels of competition and decreasing product life cycles involve that innovations may be more important than ever in allowing firms to improve profitability and maintain competitive advantage. However, because of the difficulties in measuring both innovation and firm performance, previous literature highlights mixed trends. This work empirically analyses the effect of innovation efforts on firm performance, using panel data models from 498 Nordic firms over the period 2008-2016. Because firm performance is a multidimensional construct, the relationship is analysed by using the ROA, ROE, labour productivity, capital productivity, debt to equity ratio and working capital over total assets as dependent variables. Results suggest that profitability is the most influenced by innovation, while other measures present differences between firm sectors and size.