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Product versus Process: Innovation Strategies of Multi-Product Firms

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  • Lisandra Flach
  • Michael Irlacher

Abstract

We investigate the effect of better access to foreign markets on innovation strategies of multi-product firms in industries with different scope for product differentiation. Industry-specific demand and cost linkages induce a distinction between the returns to innovation. In differentiated industries, cannibalization is lower and firms invest more in product innovation. In homogeneous industries, firms internalize intra-firm spillovers and invest more in process innovation. We test these predictions using Brazilian firm-level data. Following an exchange rate devaluation, firms have better access to foreign markets and exploit economies of scale in innovation. We evaluate the differential effects across industries and show that the type of innovation depends on the degree of product differentiation.

Suggested Citation

  • Lisandra Flach & Michael Irlacher, 2015. "Product versus Process: Innovation Strategies of Multi-Product Firms," CESifo Working Paper Series 5405, CESifo.
  • Handle: RePEc:ces:ceswps:_5405
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    Cited by:

    1. Letizia Montinari & Massimo Riccaboni & Stefano Schiavo, 2021. "Innovation, trade and multi‐product firms," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 311-337, February.
    2. Lisandra Flach & Michael Irlacher, 2018. "Product versus Process: Innovation Strategies of Multiproduct Firms," American Economic Journal: Microeconomics, American Economic Association, vol. 10(1), pages 236-277, February.
    3. Eckel, Carsten & Irlacher, Michael, 2017. "Multi-product offshoring," European Economic Review, Elsevier, vol. 94(C), pages 71-89.
    4. Jackie M.L. Chan & Michael Irlacher & Michael Koch, 2022. "Multiproduct Mergers and the Product Mix in Domestic and Foreign Markets," CESifo Working Paper Series 9722, CESifo.
    5. Bryson, Alex & Dale-Olsen, Harald, 2020. "Unions, Tripartite Competition and Innovation," IZA Discussion Papers 13015, Institute of Labor Economics (IZA).
    6. 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.
    7. Nobuyuki Takashima & Yasunori Ouchida, 2020. "Quality‐improving R&D and merger policy in a differentiated duopoly: Cournot and Bertrand equilibria," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1338-1348, October.
    8. Forslid, Rikard & Okubo, Toshihiro, 2023. "Trade, location, and multi-product firms," Regional Science and Urban Economics, Elsevier, vol. 100(C).
    9. Flach, Lisandra & Irlacher, Michael & Unger, Florian, 2021. "Corporate taxes and multi-product exporters: Theory and evidence from trade dynamics," Journal of International Economics, Elsevier, vol. 132(C).
    10. Chunming Zhao & Qun Zhang, 2016. "Input Trade Liberalization and Export Product Scope: Evidence from China," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 118-132, December.
    11. Carsten Eckel & Lisandra Flach & Ning Meng, 2023. "Demand and Supply Side Linkages in Exporting Multiproduct Firms," Rationality and Competition Discussion Paper Series 456, CRC TRR 190 Rationality and Competition.
    12. Franz Hackl & Michael Hölzl-Leitner & Dieter Pennerstorfer, 2021. "How to Measure Product Differentiation," Economics working papers 2021-01, Department of Economics, Johannes Kepler University Linz, Austria.
    13. Michael Irlacher, 2022. "Multi-product Firms in International Economics," Economics working papers 2022-01, Department of Economics, Johannes Kepler University Linz, Austria.
    14. Ina C. Jäkel & Allan Sørensen, 2020. "Quality‐cum‐price sorting," The World Economy, Wiley Blackwell, vol. 43(5), pages 1346-1370, May.
    15. Michael Irlacher, 2018. "Multi-product firms and gains from trade through intra-firm adjustments," Economics Bulletin, AccessEcon, vol. 38(4), pages 2266-2272.
    16. Daniel Baumgarten & Michael Irlacher & Karin Mayr‐Dorn, 2022. "Internationalization strategies of multi‐product firms: The role of technology," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1929-1965, November.
    17. Xinghua Deng & Ran Jing & Zheng Liang, 2020. "Trade liberalisation and domestic brands: Evidence from China's accession to the WTO," The World Economy, Wiley Blackwell, vol. 43(8), pages 2237-2262, August.
    18. Wenbo Zhu, 2023. "Skill‐replacing process innovation and the labour market: Theory and evidence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1583-1614, November.
    19. Rikard FORSLID & OKUBO Toshihiro, 2024. "R&D Subsidies and Multi-product Firms," Discussion papers 24015, Research Institute of Economy, Trade and Industry (RIETI).
    20. Lim, King Yoong & Morris, Diego, 2023. "Business optimism and the innovation-profitability nexus: Introducing the COVID-19 adaptable capacity framework," Research Policy, Elsevier, vol. 52(1).
    21. Sarbu, Miruna, 2022. "The impact of industry 4.0 on innovation performance: Insights from German manufacturing and service firms," Technovation, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    multi-product firms; innovation; product differentiation; cannibalization effect; spillovers; market size effect;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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