IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-25-00367.html

On the strategic choice of innovation type

Author

Listed:
  • Iacopo Grassi

    (Department of Economics and Statistics (DISES), University of Naples Federico II)

Abstract

This note studies the strategic choice between product and process innovation under hard budget constraints. Firms cannot invest in both dimensions, so innovation choices are shaped by strategic interaction as well as private returns. We show that when quality-enhancing innovation becomes sufficiently effective, firms coordinate on a symmetric profile in which both adopt product innovation, even though social welfare is maximized by asymmetric specialization. A minimal ex ante subsidy, targeted to the direction of innovation, is enough to implement the welfare-optimal asymmetric allocation without distorting market competition. The results highlight how simple, directional incentives can correct strategic misalignment in resource-constrained innovation environments.

Suggested Citation

  • Iacopo Grassi, 2026. "On the strategic choice of innovation type," Economics Bulletin, AccessEcon, vol. 46(1), pages 111-122.
    • Handle: RePEc:ebl:ecbull:eb-25-00367
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2026/Volume46/EB-26-V46-I1-P11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    2. Trinh Le & Adam B. Jaffe, 2017. "The impact of R&D subsidy on innovation: evidence from New Zealand firms," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 26(5), pages 429-452, July.
    3. Eugenio J. Miravete & José C. Pernías, 2006. "Innovation Complementarity And Scale Of Production," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 1-29, March.
    4. Rosenkranz, Stephanie, 2003. "Simultaneous choice of process and product innovation when consumers have a preference for product variety," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 183-201, February.
    5. Carlo Capuano & Iacopo Grassi, 2019. "Spillovers, product innovation and R&D cooperation: a theoretical model," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 28(2), pages 197-216, February.
    6. Luca Lambertini, 2003. "The monopolist's optimal R&D portfolio," Oxford Economic Papers, Oxford University Press, vol. 55(4), pages 561-578, October.
    7. Claudia Cantabene & Iacopo Grassi, 2024. "Firm performance and R&D cooperation: what matters?," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 33(1), pages 142-165, January.
    8. Carlo Capuano & Iacopo Grassi, 2022. "R&D incentives to cooperate and invest with licensing," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 31(6), pages 539-551, August.
    9. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 609-639, Elsevier.
    10. Ping Lin & Kamal Saggi, 2023. "Product differentiation, process R&D, and the nature of market competition," World Scientific Book Chapters, in: Kamal Saggi (ed.), Technology Transfer, Foreign Direct Investment, and the Protection of Intellectual Property in the Global Economy, chapter 29, pages 647-657, World Scientific Publishing Co. Pte. Ltd..
    11. Flavio Calvino, 2019. "Technological innovation and the distribution of employment growth: a firm-level analysis," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 28(1), pages 177-202.
    12. Godfrey Kamutando & Fiona Tregenna, 2024. "Complementarity between product and process innovation in small and micro-enterprises in Johannesburg, South Africa," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 33(6), pages 792-818, August.
    13. Stefano Bianchini & Gabriele Pellegrino & Federico Tamagni, 2018. "Innovation complementarities and firm growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 27(4), pages 657-676.
    14. Carlo Capuano & Iacopo Grassi, 2020. "Imperfect patent protection, licensing, and willingness to pay for the innovation," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(2), pages 333-359, June.
    15. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, vol. 102(1), pages 131-166, February.
    16. Andrea Mantovani, 2006. "Complementarity between product and process innovation in a monopoly setting," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(3), pages 219-234.
    17. Brian Paul Cozzarin, 2017. "Impact of organizational innovation on product and process innovation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 26(5), pages 405-417, July.
    18. Claudia Cantabene & Iacopo Grassi, 2019. "Public and private incentives to R&D cooperation in Italy," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 28(3), pages 217-242, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iacopo Grassi, 2026. "Subsidies, costs, and local taxes: a theoretical note on circular economy investments," Economics Bulletin, AccessEcon, vol. 46(1), pages 209-218.
    2. Banholzer, Nicolas & Behrens, Vanessa & Feuerriegel, Stefan & Heinrich, Sebastian & Rammer, Christian & Schmoch, Ulrich & Seliger, Florian & Wörter, Martin, 2019. "Knowledge spillovers from product and process inventions in patents and their impact on firm performance. End report," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, number 222367.
    3. Saha, Souresh, 2014. "Firm's objective function and product and process R&D," Economic Modelling, Elsevier, vol. 36(C), pages 484-494.
    4. Lambertini, Luca & Mantovani, Andrea, 2009. "Process and product innovation by a multiproduct monopolist: A dynamic approach," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 508-518, July.
    5. Li, Shoude & Ni, Jian, 2016. "A dynamic analysis of investment in process and product innovation with learning-by-doing," Economics Letters, Elsevier, vol. 145(C), pages 104-108.
    6. Ghosh, Arghya & Kato, Takao & Morita, Hodaka, 2017. "Incremental innovation and competitive pressure in the presence of discrete innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 1-14.
    7. Ramsza Michał & Karbowski Adam, 2020. "Product R&D Coopetition and Firm Performance," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(2), pages 1-9, June.
    8. Andrea Mantovani, 2006. "Complementarity between product and process innovation in a monopoly setting," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(3), pages 219-234.
    9. Dongdong Li & Chenxuan Shang, 2022. "When does environmental innovation crowd out process innovation? A dynamic analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2275-2283, September.
    10. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Input specificity and product differentiation," ISER Discussion Paper 0745, Institute of Social and Economic Research, The University of Osaka.
    11. Maria Rosa Battaggion & Piero Tedeschi, 2021. "How do demand and costs affect the nature of innovation?," Journal of Economics, Springer, vol. 133(3), pages 199-238, August.
    12. Jennifer González-Blanco & Jose Luis Coca-Pérez & Manuel Guisado-González, 2018. "The Contribution of Technological and Non-Technological Innovation to Environmental Performance. An Analysis with a Complementary Approach," Sustainability, MDPI, vol. 10(11), pages 1-26, November.
    13. Antonioli, Davide & Marzucchi, Alberto & Rentocchini, Francesco & Vannuccini, Simone, 2024. "Robot adoption and product innovation," Research Policy, Elsevier, vol. 53(6).
    14. Acconcia Antonio & Beraldo Sergio & Capuano Carlo & Stimolo Marco, 2023. "Public Subsidies and Cooperation in Research and Development. Evidence from the LAB," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 23(3), pages 727-760, July.
    15. Neil Foster-McGregor & Mario Holzner & Michael Landesmann & Johannes Pöschl & Robert Stehrer & Roman Stöllinger, 2013. "A ‘Manufacturing Imperative’ in the EU – Europe's Position in Global Manufacturing and the Role of Industrial Policy," wiiw Research Reports 391, The Vienna Institute for International Economic Studies, wiiw.
    16. Munirul Nabin & Pasquale Sgro & Surjasama Lahiri, 2023. "The role of standard‐setting organizations in deciding product quality and process innovation," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(4), pages 767-786, December.
    17. Genlong Guo & Shoude Li, 2023. "A dynamic analysis of a monopolist's efforts for improving product quality and process innovation with reference price effects under linear demand," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2328-2345, June.
    18. de Haas, Ralph & Popov, A., 2018. "Financial Development and Industrial Pollution," Other publications TiSEM a0a4fb82-734a-442a-9ea1-a, Tilburg University, School of Economics and Management.
    19. Çağatay Bircan & Ralph De Haas, 2020. "The Limits of Lending? Banks and Technology Adoption across Russia," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 536-609.
    20. Andrés Barge-Gil & Elena Huergo & Alberto López & Lourdes Moreno, 2018. "Empirical models of firms’ R&D," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 18, pages 475-516, Edward Elgar Publishing.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-25-00367. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.