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Profits, Innovation, Investment. Exploring the Virtuous Circle

Author

Listed:
  • Giuseppe Simone

    (Università di Siena)

  • Rinaldo Evangelista

    (Università di Camerino)

  • Mario Pianta

    (Scuola Normale Superiore)

Abstract

The article explores the dynamic relationships between profits, product innovation and capital investments. A virtuous circle model is proposed where product innovation and investment are the key drivers of profits, which in turn support technological change and capital accumulation. In our model industries are characterised by two different trajectories for innovation and investments—either ‘embodied’ in machinery and equipment, aiming at cost competitiveness, or knowledge-related and aiming at technological competitiveness. The model is empirically tested on 40 manufacturing and service industries in six major European countries. The empirical analysis confirms that product innovations and capital investments are distinct drivers of profit growth. A virtuous circle between profit, innovation and investment is mainly found in the industries characterised by strategies of technological competitiveness.

Suggested Citation

  • Giuseppe Simone & Rinaldo Evangelista & Mario Pianta, 2025. "Profits, Innovation, Investment. Exploring the Virtuous Circle," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 11(3), pages 855-880, November.
    • Handle: RePEc:spr:italej:v:11:y:2025:i:3:d:10.1007_s40797-024-00281-7
    DOI: 10.1007/s40797-024-00281-7
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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