Innovation strategies and firm performance

Abstract Innovation is often seen as crucial for firm survival and as a way for firms to differentiate themselves from their rivals. However, innovation studies are vague about the actual importance of different innovation strategies. In this study, we distinguish between pure product, process, organizational, and marketing innovations and their combinations. We use a (balanced) panel data set with more than 15,000 firm-year observations for manufacturing firms to analyze the performance of firms with different innovation strategies. Additionally, we investigate from a societal perspective whether innovation facilitates less efficient firms to catch up, or whether firms already utilizing best practices are the main beneficiaries. Using Data Envelopment Analysis (DEA), we find the highest increase in firms’ performance among the firms with innovation strategies that combine product innovation with other innovation types. This finding applies to both the short and the longer term. We also conclude that catch-up is strongest among the firms adopting pure process innovation, whereas the other innovation strategies are primarily associated with frontiers shifts.