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Product versus Process: Innovation Strategies of Multi-Product Firms

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  • Flach, Lisandra
  • Irlacher, Michael

Abstract

We investigate the effects 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. Using firm-level data and large exchange rate devaluations, we show that better access to foreign markets increases the incentive to innovate. However, we exploit differential effects across industries and show that the innovation strategies depend on the scope of differentiation.

Suggested Citation

  • Flach, Lisandra & Irlacher, Michael, 2017. "Product versus Process: Innovation Strategies of Multi-Product Firms," CEPR Discussion Papers 11922, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11922
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    More about this item

    Keywords

    Multi-product firms; Innovation; Cannibalization effect; Spillovers; Market size effect; Product differentiation;
    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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