Innovation, productivity and firm performance

This paper systematically assesses the impact of innovative activities on US firms' total factor productivity and in turn the implications for firm performance. Initially, we find that firm-level productivity trends in our sample of over 2000 Russell 3000 companies match those of the wider US economy. Applying a hierarchical clustering algorithm to measures of innovation we find that there are clusters of innovation within the Russell 3000 and that these tend to be related to higher productivity. To assess this relationship more robustly we then use a fixed effects panel model to directly test innovation measures as drivers of productivity. We find that research and development (R&D) spending and intangible investment, the size of a firm's patent portfolio and the quality of its patents, increase a firm's level of productivity. An innovation index is then created, ranking the relative importance of these innovation factors for the firm’s productivity. The impact of a firm's innovation rankings on its returns is then assessed and we find that there is a strong statistically significant positive impact here - with those higher up in the index on average delivering stronger returns. The pathway of companies through the index overtime is also studied and we find that there is evidence of innovation mattering for firm performance but also of firms’ need to continually innovate to stay ahead of the pack.