Does Innovation Lead to Firm Growth? Explorative versus Exploitative Innovations

ABSTRACT

In this article, we examine the relationship between innovation and firm growth. Drawing on previous research, we implement a classification of innovations based on whether they are explorative or exploitative. Access to Swedish register data comprising the entire private sector from 1997 to 2012 allows us to construct innovation patterns for more than 480,000 firms. GMM-estimations confirm a significant and positive effect of both exploitative and explorative innovation on firms’ employment growth. More radical explorative innovations are shown to have a more persistent growth effect, while exploitative innovation increases labour demand in the short run.

KEYWORDS:

• Innovation
• firm growth
• exploration innovation
• exploitation innovation

JEL CLASSIFICATION:

• O31
• L25

Acknowledgments

We would like to thank Ding Ding for excellent support with the econometric part of the study.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data that support the findings of this study are available from Statistics Sweden (SCB). Restrictions are applied to the availability of these data, which are used under licence for this study. Further information on how to access these data can be found at:

https://www.scb.se/en/services/ordering-data-and-statistics/guidance-for-researchers-and-universities/

Notes

¹ Akcigit and Kerr (2018), introducing similar concepts in a theoretical model, provide some correlations.

² Industry demand is measured as industry-aggregated gross value added. All monetary variables are measured in fixed prices..

³ The influence of types of ownership on employment growth and innovation are inconclusive (see e.g. Barba Navaretti 2004; Dachs and Peters 2014).

⁴ See Herstad (2018). We use the first level of NACE Rev. 2 to identify 20 industries.

⁵ We use 72 labour market regions (FA-regions) as our spatial unit of measurement.

⁶ The validity of this assumption is subsequently tested using the Sargan test.

⁷ The depreciation rate for knowledge capital is five years (Griliches 2007).

⁸ The patent applications classes (121) are determined at the two-digit level of International Patent Classification (IPC). See Bloom, Schankerman, and Van Reenen (2013) for a similar approach.

⁹ See Daunfeldt and Halvarsson (2015) for details regarding the employment-growth distribution of Swedish firms.

¹⁰ Labour regulations may also deter laying off employees.

¹¹ The results are virtually unchanged when using a three-year window of innovation or a Heckman selection model to control for survival effects. We expect them to be robust to a separation on patenting and non-patenting firms, see Balasubramanian and Sivadasan (2011).

¹² For a brief discussion of alternative innovation measures, see Colombelli, Krafft, and Quatraro (2014).

Additional information

Funding

This work was supported by Marianne and Marcus Wallenberg’s Foundation.