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Working Paper Cnr-Ceris, N° 01/2013

Managerial capacity in the innovation process and firm profitability

Giovanni Cerulli and Bianca Potì

CNR - National Research Council of Italy
CERIS - Institute for Economic Research on Firm and Growth
Via dei Taurini 19, 00185 Roma, ITALY

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Abstract: This paper studies at firm level the relation between managerial capacity in doing innovation and profitability. Moving along the intersection between the evolutionary/neo-Schumpeterian theory and the Resource-Based-View of the firm, we prove econometrically that managerial efficiency in mastering the production of innovation is an important determinant of firm innovative performance and market success, and that it complements traditional Schumpeterian drivers. By using a Stochastic Frontier Analysis, we provide a “direct” measure of innovation managerial capacity, then plugged into a profit margin equation augmented by the traditional Schumpeterian drivers of profitability (size, demand, market size and concentration, technological opportunities, etc.) and other control-variables. We run both a OLS and a series of Quantile Regressions to better stress the role played by companies’ heterogeneous response of profitability to innovative managerial capacity at different points of the distribution of the operating profit margin.Results find evidence of an average positive effect of the innovation managerial capacity on firm profitability, although quantile regressions show that this “mean effect” is mainly driven by a stronger magnitude of the effect for lower quantiles (i.e., for firms having negative or low positive profitability). It means that lower profitable firms might gain more from an increase of managerial efficiency in doing innovation than more profitable businesses.

Keywords: Innovation; Firm profitability; Managerial capacity; Firm capabilities; Evolutionary/Neo-Schumpeterian theory; Stochastic frontier analysis; Quantile regression

JEL Codes: O31; D22; C22

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