Abstract
This chapter investigates the relationships between innovativeness and firm performance from a multidimensional viewpoint. As previous studies have shown controversial results on the performance implications for innovative capacity, the promising venue for the innovation research study is to address the question of under which conditions innovativeness leads to improved financial performance. To this end, the results of this study demonstrate some major findings. First, non-technical innovativeness exerts positive influence over technical innovativeness. Second, novelty of technical innovation activities causes a diminishing effect on financial performance due to the ambiguity of value-creation. Third, technical innovativeness enhances financial performance when the relationship between technical innovativeness and financial performance is mediated by market effectiveness and production efficiency. Overall, this chapter clarifies the conflicting results on the innovativeness-financial performance link and hence contributes to the innovation literature.
TopIntroduction
Innovativeness is an evolving phenomenon of the new economy. Despite the central role of innovation for organizational growth in the knowledge economy, the performance implications of firm innovativeness still remain challenging. Innovative capacity of a firm would undoubtedly support the improvement of overall firm performance. However, empirical research on its performance implications shows controversial results. A large and considerable number of researchers investigating the technical innovativeness-performance relationship (e.g. Centobelli, Cerchione, & Singh, 2019; Cho & Pucik, 2005; Damanpour, Szabat, & Evan, 1989; DeCarolis & Deeds, 1999; Han, Kim, & Srivastava, 1998; Johne & Davies, 2000; Li & Atuahene-Gima, 2001; Marques & Ferreira, 2009; Pett & Wolff, 2009; Roberts, 1999; Vermeulen, De Jong, & O'Shaughnessy, 2005; Xin, Yeung, & Cheng, 2010) support the positive performance implications. The others (e.g. Freel & Robson, 2004; Heunks, 1998; Moreira, Gherman, & Sousa, 2017) report either negative or statistically insignificant effect of technical innovativeness on performance. These conflicting research results deal exclusively with the unidimensional nature of performance measurement (Rosenbusch, Brinckmann, & Bausch, 2011; Subramanian & Nilakanta, 1996). The financial measures such as return on assets or profitability cannot fully account for all aspects of firm performance. Innovativeness requires extra investments and significant expenditures made in existing production systems, but at the same time potential future returns from the innovations cannot be known precisely since the success of innovation projects depends on the impact of novelties on the areas relevant for production and markets (Mackelprang, Bernardes, Burke, & Welter, 2018; Talay, Akdeniz, & Kirca, 2017).
Key Terms in this Chapter
Financial Performance: The main performance category used in assessment of business performance. Financial ratios (such as return on sales, return on assets, EBITDA margin and cash flow from operating activities) are key indicators of the financial performance of the company.
Process Innovativeness: Firm capacity to make significant changes in production techniques and procedures, and inward & outward logistics methods and procedures.
Technical Innovation: A kind of innovation that occurs with the development or application of new technologies. It comprises product and process innovation.
Marketing Innovativeness: Firm capacity to make significant changes in product aesthetic design, product packaging, sales channels and product placement methods, product promotion and advertising techniques.
Product Innovativeness: Firm capacity to make significant changes in technical product specifications and functional characteristics, ergonomic product design features, components and materials.
Non-Financial Innovation Performance: The complementary category of innovation performance that can be divided into the two fundamental branches such as market effectiveness and production efficiency. New product-development speed, market share growth, opening up new markets, building product visibility and awareness, and so forth are of the criteria for non-financial performance that determines market effectiveness. Production efficiency consists of organization performance goals such as production costs, volume flexibility of production, production and delivery speed, production quality.
Innovation: Development and commercialization of a new product that includes a significant change(/s) or improvement(/s) in its technical and non-technical characteristics. Innovation has been classified in different categories basically varying between the two extreme ends of a novelty continuum: from incremental (or continuous) to radical (or discontinuous). Each innovation type stands somewhere in an extent of what the novelty (or newness) of innovation is. Newness of innovation refers to the degree of familiarity with the new product across every market segment of the global economy.
Non-Technical Innovation: A kind of innovation that arises from the use of new business methods and new organizational concepts, without the necessity for technological change. It comprises marketing and organizational innovation.
Organizational Innovativeness: Firm capacity to make significant changes in business routines and practices, information processing systems, workplace organization with greater employee autonomy in decision making, and managing external relationships.
Innovativeness: Firm capacity to make innovation in different degrees from evolutionary to revolutionary. On the one hand, incremental improvement in innovation activities increases competitiveness within current markets or industries. On the other hand, destructive effect of innovation creates a dramatic change that transforms existing markets or industries. In this case, technology progress from the product-side view (or innovative capacity of a firm to reshape the value system) and market development from the market-side view can be viewed as the two dimensions of determining innovation capacity. In other words, novelty (/newness) of innovation depends on innovativeness of a firm on the whole value chain activities and its impact on the target market. Incremental innovation and radical innovation compose the two ends of novelty spectrum.