Could more innovation output bring better financial performance? The role of financial constraints

Abstract

AbstractInnovation scholars highlight the economic benefits to firms, while research findings on the relationship between innovation output and economic returns remain mixed. In this study, we develop the profiting from innovation (PFI) framework and address the crucial role of financial constraints in the relationship between innovation output and financial performance. We argue that the liability of newness differentiates firms’ financial performance during the commercialization of innovation, leading to a U-shaped relationship between firms’ innovation output and financial performance. We further document the moderating impact of individual financial constraints (IFC) and market-based financial constraints (MFC) on this curvilinear relationship. Empirical tests based on the 142,972 firm-year observations of the multi-source dataset of Chinese manufacturing firms from 1999–2009 support our hypotheses. The additional analysis shows that non-state-owned enterprises and small and medium enterprises benefit more from the synergistic effect of reductions of IFC and MFC than state-owned enterprises and large firms. Our study enriches the literature of the PFI framework by uncovering the mechanism between innovation output and economic returns where financial constraints play an essential role. To the best of our knowledge, we are among the first to investigate the processes and mechanisms between innovation output and financial performance, generating novel insights for business practitioners and policymakers.