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Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan's Early Industrialization

Author

Listed:
  • Serguey Braguinsky
  • Atsushi Ohyama
  • Tetsuji Okazaki
  • Chad Syverson

Abstract

We explore how firms grow by adding products. We leverage detailed data from Japan's cotton spinning industry at the turn of the last century to do so. This setting allows us to fully characterize the type of differentiation (vertical or horizontal) of new product introductions as well as whether the product is within or outside of the firm's prior technological capabilities. We find that trying to introduce innovative products beyond the firm's previous technologically feasible set, even if such trials fail, is a key to firm growth. Indeed, it mostly facilitates growth through the firm's later success in horizontal product diversification. In long-term outcomes, the right tail of the firm size distribution becomes dominated by firms that first moved into technologically challenging products and then later applied their newly acquired technical competence to horizontal expansion of their product portfolios. Two mechanisms through which this knowledge transfer occurs are greater production system flexibility and higher product appeal to downstream buyers.

Suggested Citation

  • Serguey Braguinsky & Atsushi Ohyama & Tetsuji Okazaki & Chad Syverson, 2021. "Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan's Early Industrialization," American Economic Review, American Economic Association, vol. 111(12), pages 3795-3826, December.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:12:p:3795-3826
    DOI: 10.1257/aer.20201656
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    Cited by:

    1. Qu, Guimin & Jing, Hao, 2025. "Is new technology always good? Artificial intelligence and corporate tax avoidance: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 98(C).
    2. Maloney,William F. & Zambrano,Andrés, 2021. "Learning to Learn : Experimentation, Entrepreneurial Capital, and Development," Policy Research Working Paper Series 9890, The World Bank.
    3. Alex Coad, 2022. "Lumps, Bumps and Jumps in the Firm Growth Process," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 18(4), pages 212-267, April.
    4. Fu, Tong & Qiu, Zhaoxuan & Yang, Xiangyang & Li, Zijun, 2024. "The impact of artificial intelligence on green technology cycles in China," Technological Forecasting and Social Change, Elsevier, vol. 209(C).
    5. Tetsuji Okazaki, 2023. "Designing wartime economic controls: Productivity and firm dynamics in the Japanese cotton spinning industry, 1937–9," Economic History Review, Economic History Society, vol. 76(4), pages 999-1022, November.
    6. Abedassalam Braidy & Shaligram Pokharel & Tarek Y. ElMekkawy, 2025. "Research Perspectives on Innovation in the Automotive Sector," Sustainability, MDPI, vol. 17(7), pages 1-28, March.
    7. Timothy E. Dore & Tetsuji Okazaki & Ken Onishi & Naoki Wakamori, 2025. "Firm growth and financial constraints: evidence from a policy-based loan program," Small Business Economics, Springer, vol. 65(1), pages 131-162, June.
    8. Stjepan Srhoj & Alex Coad & Janette Walde, 2024. "HGX: the anatomy of high growth exporters," Small Business Economics, Springer, vol. 63(4), pages 1695-1720, December.
    9. Akin A. Cilekoglu, 2023. "“Export Destination and Firm Upgrading: Evidence from Spain”," AQR Working Papers 202303, University of Barcelona, Regional Quantitative Analysis Group, revised May 2023.
    10. Babina, Tania & Fedyk, Anastassia & He, Alex & Hodson, James, 2024. "Artificial intelligence, firm growth, and product innovation," Journal of Financial Economics, Elsevier, vol. 151(C).
    11. Tetsuji Okazaki, 2022. "``Designing Wartime Economic Controls: Productivity and Firm Dynamics in the Japanese Cotton Spinning Industry, 1937-1939''," CIRJE F-Series CIRJE-F-1187, CIRJE, Faculty of Economics, University of Tokyo.
    12. Wu, Yongqiu & Lin, Zhiwei & Zhang, Qingcui & Wang, Wei, 2024. "Artificial intelligence, wage dynamics, and inequality: Empirical evidence from Chinese listed firms," International Review of Economics & Finance, Elsevier, vol. 96(PC).
    13. Yang Zhang & Yuexian Chang & Xiaolei Zhang & Haoyu Zhou, 2025. "Artificial Intelligence and Enterprise Technological Innovation: Evidence From China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(7), pages 4056-4069, October.
    14. Valeriu Ioan-Franc & Ioan I. Gaf-Deac, 2024. "Participation of Artificial Intelligence in Economic Growth in Romania," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 26(67), pages 944-944, August.
    15. Junmei Zhang & Lianying Yao, 2024. "Climate effects on the diversification strategy of export firms: Evidence from China," PLOS ONE, Public Library of Science, vol. 19(8), pages 1-28, August.
    16. Mahour Parast & Adegoke Oke & Matthew Doolin, 2025. "Investigating the Effect of Innovation Activities of Firms on Innovation Performance: Does Firm Size Matter?," Working Papers 25-04, Center for Economic Studies, U.S. Census Bureau.
    17. Tetsuji OKAZAKI, 2022. "Designing wartime economic controls: Productivity and firm dynamics in the Japanese cotton spinning industry, 1937–1939," CIGS Working Paper Series 22-002E, The Canon Institute for Global Studies.
    18. Mo, Jiaying & Kong, Dongmin & Rong, Zhao & Yu, Li, 2025. "Technological diversification and resilience to systematic risk: Evidence from listed firms in China," International Review of Economics & Finance, Elsevier, vol. 99(C).
    19. Mourelatos, Evangelos & Zervas, Panagiotis & Lagios, Dimitris & Tzimas, Giannis, 2024. "Can AI Bridge the Gender Gap in Competitiveness?," GLO Discussion Paper Series 1404, Global Labor Organization (GLO).
    20. Liu, Qing & Qiu, Larry D. & Zhan, Chaoqun, 2024. "FDI inflows and export quality: Domestic competition and within-firm adjustment," Journal of Development Economics, Elsevier, vol. 170(C).

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L67 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Consumer Nondurables: Clothing, Textiles, Shoes, and Leather Goods; Household Goods; Sports Equipment
    • N65 - Economic History - - Manufacturing and Construction - - - Asia including Middle East
    • N85 - Economic History - - Micro-Business History - - - Asia including Middle East
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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