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Out-of-equilibrium profit and innovation

  • Cristiano Antonelli
  • Giuseppe Scellato

Innovation is the result of intentional decision-making that takes place in out-of-equilibrium conditions. Profitability is a reliable indicator of equilibrium conditions, far better than competition, as it integrates the effects of out-of-equilibrium conditions in both product and factor markets. The farther the profitability from the average, the deeper the out-of-equilibrium conditions. The farther away the firm from equilibrium, the stronger the likelihood for innovation to take place. The hypothesis of a U-shaped relationship between levels of profitability and innovative activity, as measured by the rates of increase in total factor productivity (TFP), is articulated and tested. The evidence from a large sample of 7000 Italian manufacturing firms in the years 1996-2005 confirms the presence of a quadratic, convex relationship between profitability and the growth rates of TFP.

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Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

Volume (Year): 20 (2011)
Issue (Month): 5 ()
Pages: 405-421

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Handle: RePEc:taf:ecinnt:v:20:y:2011:i:5:p:405-421
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