Effect of Innovation on Firm Performance — The Case of a Technology Intensive Manufacturing Cluster in India

Abstract

Industrial clusters can be sources of innovation. Further, externalities rendered by clusters entitled firms in clusters to various economic benefits. The motivation of the study is to understand what determines the net benefits that these cluster firms receive. While innovation is a key driver of firm performance, it has not been probed adequately in the context of a cluster. The present study which draws data from 101 technology intensive manufacturing firms in Bengaluru cluster adopts stratified random sampling technique. The study employs Fuzzy-set Qualitative Comparative Analysis (fsQCA) to examine the influence of firm-level innovation on performance, considering the role of various firm-specific factors in moderating the relationship between innovation and performance. The results of the study reveal that there does not exist any direct relationship between innovation and firm performance. However, a strong and nonlinear relationship between them is moderated by firm-specific factors such as firm size, nature of Industry, origin of a firm and firms’ age. The findings of the study have brought out an important lesson for policy makers that mere promotion of industrial clusters does not ensure the generation of innovations by firms located therein, for their benefit. A cluster focused innovation promotion policy has to consider industry/firm-specific characteristics for its effective implementation.