Failure, innovation, and productivity growth: Evidence from a structural model

ABSTRACT

This study employs a simultaneous equation model to examine the extent to which firms’ innovation failure can affect future innovation and productivity growth. Our findings suggest that experiencing past failure in the innovation process enhances the innovation performance of a firm; this, in turn, contributes to productivity growth. The primary contribution of this study is the proposal of a conceptual model for the innovation process that considers failure experience as a major input to the knowledge production function. Our results also offer several implications for innovation managers and policymakers. For example, innovation policy initiatives should consider not only the tangible accomplishments of firms, but also their failure experiences. This study also highlights a method to enhance innovation by establishing systems that encourage challenging research and recognise and reward the process, even when a project fails.

KEYWORDS:

• Learning from failure
• innovation process
• innovation failure
• organisational learning
• productivity growth
• knowledge production function

Acknowledgments

This research was supported by Konkuk University in 2021. This paper is a modified version of a part of the first author’s doctoral dissertation. The authors are grateful to the three anonymous referees and the editor for their valuable and helpful comments.

Disclosure statement

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

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1. We thank an anonymous reviewer for raising the concern that a causal relationship between innovation failure and R&D may be found, as R&D is the only way firms can implement a ‘revision’ or the like, to their R&D. While this could happen under certain circumstances, the implementation of the revision does not necessarily increase the R&D investment amount. Rather, R&D would be more efficiently delivered owing to the lessons from failure experiences, leading to more successful results even without increasing investment. Further, the data used in the present study do not support the reviewer’s argument. Testing several lagged values, we find little correlation between innovation failure and R&D. In addition, we conduct a 3SLS analysis, which adds the innovation failure variable into Equation (1)(1) $R\text{amp}{D}_{i,t-1}=a_1{x}_{i,t-1}^{\prime }+{\mathrm{u}}_{i,t-1}$(1) , with R&D as the dependent variable. We find no difference from the existing results.