Study Reveals the Strong Returns from Investing in Innovation

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For those of us who are on board with the merits of innovation, it can seem obvious that innovating is a good thing.  Ok, we might accept that innovation is not always done very well and the results could therefore be a bit of a let down, but overall, innovating is better than not innovating.

If you’re still facing a skeptical boss however, a recent paper from researchers at the University of Houston may help you out.  They set out to examine the impact of investing in ones innovative capacity on the stock price of that company, and for those of us who are cheerleaders of innovation, the results are indeed supportive.

The returns on investment

“Firms in innovation-driven industries proactively use capital investment to facilitate generation of new growth options by building (innovative capacity),” they say. “Moreover, (innovative capacity) investment increases expected revenues by allowing the firm to generate higher quality-based sales from innovations, conditional on their being generated and exercised.”

You might say that this should be fairly self-explanatory, but of course it is worth reminding ourselves that ideas, and indeed scientific breakthroughs themselves, are only of value to society and the economy when they’re developed into new products and services.  To achieve this requires a significant investment, and so having confidence in the returns on that investment matters.

“Commercializing and developing these breakthroughs require large investments by innovative firms,” the authors remind us. “Analyzing the long run financial rewards of investments in innovation are crucial to understanding the prospective economic impact of STEM initiatives.”

Supporting innovation

The research examined things such as developing research facilities or buying patents, and by distinguishing these kind of investments from more traditional kinds were able to determine the returns on investment of innovation building, both in terms of stock market growth and company profitability.

The findings are important because traditionally it was believed that investing in ones company would cause a short-term hit on both profits and share price, which may previously have put managers off of investing in innovation if their attentions were too short-term in focus.

When that investment was put into things such as research and development however, both the profits and share prices of those companies rose, with long-term results especially impressive as the investment in innovation bore fruit in terms of new products.

“This is important information for managers of these companies since it encourages them to invest in an innovative capacity, which would lead to development of new products and technologies, which is helpful for the entire economy,” the authors conclude.