The invention of new goods or services, called product innovation, and improvements in production processes, called process innovation, can have distinct impacts on firm performance. By integrating firm-level innovation survey data with financial panel data in Japan, our empirical analysis yields two key findings. First, the increasing prevalence of process innovation over product innovation has been observed over the past two decades. Second, higher market growth stimulates product innovation, which, in turn, contributes to growth in firm sales and employment over several years. In contrast, no such patterns are observed for process innovation. These results suggest that there may be a positive feedback loop between product innovation and firm growth.
Keywords: Economic Growth; Productivity; Product Innovation; Process Innovation
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.