The Risks of Innovation : Are Innovating Firms Less Likely to Die?
While innovation is a source of competitiveness, it may expose plants to survival risks. Using a rich set of plant-product data for Chilean manufacturing plants during the period 1996-2006 and discrete-time hazard models controlling for unobserved...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2012/06/16402302/risks-innovation-innovating-firms-less-likely-die http://hdl.handle.net/10986/9310 |
| Summary: | While innovation is a source of
competitiveness, it may expose plants to survival risks.
Using a rich set of plant-product data for Chilean
manufacturing plants during the period 1996-2006 and
discrete-time hazard models controlling for unobserved plant
heterogeneity, this paper shows that innovating plants have
higher survival odds. However, risk plays an important role
for the innovation-survival link: only innovators that
retain diversified sources of revenues survive longer.
Single-product innovators are at greater risk of exiting. In
addition, only innovators facing lower market risk, measured
by fewer innovative competitors, low-pricing strategies, or
lower sales volatility in the new products' markets,
see their odds of survival increase significantly. Technical
risk, measured by the proximity of product innovations to
the plants' past expertise, the degree of
sophistication of new products, or their novelty to the
Chilean market, does not play a substantial role in the
innovation-survival link. Engaging in risky innovation is
not an irrational decision, since plants reap big payoffs --
higher productivity, employment and sales growth -- from
such innovations. However, those payoffs are not always
higher than those from cautious innovation, suggesting that
constraining factors, such as credit constraints, force
plants to take on more risk when innovating. An implication
of the findings for industry dynamics is that among
innovators, only the survival of cautious innovators is
guaranteed. Since engaging in cautious innovation may not be
feasible for all plants, there could be a role for policy in
reducing innovators' exposure to risks and providing
assistance to deal with failed innovations, while setting
the right incentives. |
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