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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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Date of creation: 15 Jan 2009
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Handle: RePEc:cla:levarc:814577000000000071
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  1. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  2. C. Antonelli, 2007. "Localized Technological Change," Chapters, in: Elgar Companion to Neo-Schumpeterian Economics, chapter 16 Edward Elgar.
  3. Antonelli, Cristiano, 1989. "A failure-inducement model of research and development expenditure : Italian evidence from the early 1980s," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 159-180, October.
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  20. repec:fth:wobaco:1083 is not listed on IDEAS
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