J PROD INNOV MANAG 2010;27:725–740

r 2010 Product Development & Management Association

A Longitudinal Study of the Impact of R&D, Patents, and Product

Innovation on Firm Performance
Kendall W. Artz, Patricia M. Norman, Donald E. Hatfield, and Laura B. Cardinal

Because of increasing levels of competition and decreasing product life cycles, a firm’s ability to generate a con-
tinuous stream of innovations may be more important than ever in allowing a firm to improve profitability and
maintain competitive advantage This paper investigates several issues that are central to an examination of the
innovation productivity in a firm. First, the relationship between a firm’s commitment to research and development
and its innovative outcomes is examined. Two innovative outcomes are analyzed: (1) invention, which focuses on the
development of new ideas; and (2) innovation, the development of commercially viable products or services from
creative ideas. Invention is measured by the number of patents granted, and innovation is assessed by the number of
new product announcements. Second, because many inventions ultimately result in marketable innovations and
because patents may provide protection for new products, the relationship between patents and product announce-
ments is also investigated. Finally, the ability of a firm to benefit from its inventions and innovations is studied by
examining their separate effects on firm performance, measured as return on assets (ROA) and sales growth.
Drawing from a sample of 272 firms in 35 industries over 19 years, the results from a model of simultaneous
equations provided support for some of the hypotheses, but several other surprising findings were found. As expected,
R&D spending was positively related to patents. This finding is consistent with others who argue that internal
research capabilities, particularly those with a strong basic research component, is key to enabling a firm to generate
creative outputs. More surprising was the finding of increasing returns to scale to R&D spending. While this con-
tradicts much of the existing research, it is consistent with economic arguments for the advantages of scale in
innovation. Also interesting is the finding that, while a significant curvilinear relationship exists between R&D
spending and product announcements, it is not the predicted inverse-U but instead a U-shaped relationship. Con-
sistent with previous work, product announcements were found to be positively related to both performance mea-
sures. A negative relationship was found between patents and both ROA and sales growth. While these findings were
unexpected, they are intriguing and call into question the value of patents as protection mechanisms. In addition,
these results may be resulting from the rise of strategic patenting, where an increasing number of firms are using
patents as strategic weapons. As expected, a positive relationship was found between patents and new product
announcements.

Introduction innovation may be transitory (Greenhalgh and Lon-

gland, 2005). Conversely, a relatively rapid stream of

T
he ability of firms to develop and exploit their
innovative capabilities is widely recognized as
a critical determinant of firm performance
and competitive advantage (Bettis and Hitt, 1995;
Helfat and Peteraf, 2003; Voss, 1994). A firm’s abil-
ity to generate a continuous stream of innovations
may be more important than ever in allowing a firm to
develop or maintain competitive advantage because of
the increasing levels of competition and decreasing
product life cycles. In an environment whereby com-
petition is intense, the profits generated by any one
Address correspondence to: Kendall W. Artz, Hankamer School of
Business, Baylor University, One Bear Place #98006, Waco, TX 76798-
8006. Tel.: (254) 710-4169. Fax: (254) 710-1093. E-mail: Kendall_
Artz@Baylor.edu.
multiple innovations over time may enable the firm to
continue to generate high levels of profitability (Bar-
czak, 1995; Roberts, 1999). For these reasons, effec-
tive management of the innovation process continues
to be a focal concern for managers and business
researchers (Bogner and Bansal, 2007; Marsh and
Stock, 2003).
In this paper, several issues are investigated that are
central to an examination of the innovation produc-
tivity in a firm. First, the relationship between a firm’s
commitment to research and development and its in-
novative outcomes is examined. In evaluating a firm’s
innovative activities, it is recognized that the literature
has differentiated between invention and innovation,
and thus both forms of innovation outcomes are in-
726 J PROD INNOV MANAG
2010;27:725–740
vestigated. Grant (2008, pp. 290–91) defines an inven-
tion as distinct from an innovation: ‘‘Invention is the
creation of new products and processes through the
development of new knowledge or the combination of
existing knowledge . . . . Innovation is the initial com-
mercialization of invention by producing and market-
ing a good or service or by using a new method of
production.’’
Consistent with Grant (2008) and others (e.g., Hitt,
Hoskisson, and Nixon, 1993; Schumpeter, 1934), the
definition of invention used here focuses on the de-
velopment of new ideas, whereas innovations are con-
sidered the development of commercially viable
products or services from creative ideas. Because in-
vention and innovation represent different dimensions
of creative outputs, the impact of research and devel-
opment (R&D) spending on each is analyzed sepa-
rately. Specifically, the relationship between a firm’s
R&D spending and one measure of its inventions, the
BIOGRAPHICAL SKETCHES
Dr. Kendall Artzis professor at Baylor University. He is currently
serving as chair of the Department of Management and Entrepre-
neurship and as director of the Baylor Entrepreneurship Program.
He has a B.S. in Finance from Montana State University, an
M.B.A. from Arizona State University, and a Ph.D. in strategic
management from Purdue University. His current research interests
are in the area of corporate entrepreneurship, managing innovation,
and strategic alliances.
Dr. Patricia Norman is associate professor of management in the
Department of Management and Entrepreneurship at Baylor Uni-
versity. She has a B.A. in economics from the University of Penn-
sylvania, an M.S. in management from the Air Force Institute of
Technology, and a Ph.D. in strategic management from the Uni-
versity of North Carolina at Chapel Hill. Her research interests in-
clude innovation, strategic alliances, and downsizing.
Dr. Donald E. Hatfield is associate professor at Virginia Polytech-
nic Institute and State University (Virginia Tech). He has a B.S. in
chemical engineering from Iowa State University, an M.B.A. from
the University of Iowa, and a Ph.D. in strategic management from
the University of California, Los Angeles (UCLA). Dr. Hatfield’s
research has examined innovation, technology strategy, interna-
tional management, and corporate-level strategy. He is currently on
the editorial boards of Academy of Management Journal, Organi-
zation Science and Journal of Management.
Dr. Laura Cardinal is professor of strategic management in the C.T.
Bauer College of Business at the University of Houston. She earned
her Ph.D. from the University of Texas at Austin. Her areas of
expertise include managing innovation and research and develop-
ment (R&D) capabilities, diversification and performance, and
understanding the evolution and adaptation of control systems.
She serves on the editorial boards of Organization Science and
Strategic Management Journal. Previously, she served as the chair
for the Competitive Strategy Interest Group of the Strategic
Management Society and as chair for the Technology and Innova-
tion Management Division of the Academy of Management.
K. W. ARTZ ET AL.
number of patents granted, is tested. A separate ex-
amination investigates the relationship between R&D
spending and a measure of innovation, the number of
new product announcements. Moreover, because
many inventions ultimately result in marketable in-
novations and because patents may provide protec-
tion for new products, the relationship between
patents and product announcements is investigated.
Finally, the ability of a firm to benefit from its inven-
tions and innovations is analyzed by examining their
separate effects on firm performance.
Although a number of previous studies have ex-
amined some of the relationships investigated in this
paper, this analysis examines each of these relation-
ships in a set of simultaneous equations rather than as
separate analyses. Estimating a set of simultaneous
equations allows researchers to model a more com-
plex set of relationships between variables than can be
modeled using one equation. Thus, this analysis yields
new insight into the ultimate impact of a firm’s inno-
vative investments and activities on firm performance.
Furthermore, for each of the individual relation-
ships studied, numerous gaps in the existing literature
are addressed. For example, as Ahuja and Lampert
(2001) point out, studies that examine inventions as
an outcome of a commitment to R&D spending are
rare. Moreover, though numerous studies discuss the
managerial and organizational aspects for enhancing
new product development (e.g., Calantone, Garcia,
and Droge, 2003; Hoopes and Postrel, 1999; Peterson,
Handfield, and Ragatz, 2005; Scott, 2000), little
empirical research exists that directly examines the
relationship between R&D spending and the number
of new product introductions. The studies that have
been conducted (e.g., Langowitz and Graves, 1992;
McMillan, Mauri, and Hamilton, 2003) focused only
on the pharmaceutical industry, and thus the broad
applicability of these studies is limited.
It is also interesting to note that, although there are
convincing theoretical arguments suggesting a close
relationship between the issuance of patents and new
product introductions, little recent empirical research
validates this relationship. This gap in the literature is
particularly notable given the significant change in
patenting practices that has occurred over the past
two decades (MacDonald, 2004). Finally, while it ap-
pears to be well established that new product intro-
ductions tend to positively impact firm performance
(e.g., Cho and Pucik, 2005; Hua and Wemmerlov,
2006; Roberts, 1999), findings about the relationship
between a firm’s inventions (i.e., patents) and firm
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION
performance have been mixed. While some research-
ers (e.g., Cho and Pucik) have argued and empirically
validated that patents have a positive effect on firm
performance effective, others suggest that no relation-
ship exists (e.g., MacDonald).
The present study attempts to address the previ-
ously identified shortcomings. It does so by empiri-
cally examining these research issues using
longitudinal data from a cross-industry study of 272
firms over a recent 19-year period (1986–2004). Since
multiple industries are represented, controls for in-
dustry effects are included in the empirical analysis.
This paper is structured as follows. The next section
describes in greater detail the theoretical arguments
concerning the framework that is developed and
tested. The sample and methodology is then dis-
cussed. Finally, the results and conclusions from the
study are presented.
Theory and Hypotheses
The Influence of R&D Spending on Innovation
Outputs
The commitment to developing the capabilities nec-
essary to generate and accumulate internal knowledge
has been identified as a crucial factor in leveraging
firm learning processes (Chiesa, 1996; Helfat and Pet-
eraf, 2003). Firms must also be able to understand
and use the knowledge created if it is ever to be trans-
formed into an invention that can result in a market-
able product (Greenhalgh and Longland, 2005).
Internal research capabilities, as indicated by a firm’s
commitment to funding R&D, enable a firm to create,
understand, and use knowledge (Penner-Hahn and
Shaver, 2005). As stated by Hall, Griliches, and
Hausman (1986, p. 265), ‘‘The annual research and
development expenditures of a firm are considered
to be investments which add to a firm’s stock of
knowledge.’’ In addition, strong R&D spending
capabilities not only play a direct role in creating
the internal knowledge needed for product innovation
but also allow evaluation of potential outcomes of the
knowledge created (Rosenberg, 1990). Moreover, a
strong set of internal competencies in research
and development allows the evaluation and use of
knowledge created outside the firm. Thus, the firms
can access knowledge in the public domain and
bring that into the firm and use it to create new prod-
ucts. As such, the capability residing in research de-
J PROD INNOV MANAG 727
2010;27:725–740
partments is one of the key predictors of a firm’s
ability to generate inventive outputs (Cardinal and
Hatfield, 2000).
R&D spending and its outcomes have long been
explored by economists in empirical studies (e.g.,
Mansfield, 1962). In general, this research has found
a positive impact of R&D spending on firm outcomes.
For example, both Mansfield (1980) and Griliches
(1986) found that a commitment to R&D spending
was positively related to a firm’s innovative ability as
reflected in its productivity growth. Other researchers
have more directly examined the relationship between
R&D spending and patenting practices, the measure
of invention used in this study. In their seminal re-
search across a broad range of firms and industries,
Pakes and Griliches (1984) and Bound et al. (1984)
found a strong relationship between R&D spending
and the number of patents—results later confirmed by
Hall et al. (1986). Jensen (1987) found that the level of
R&D spending was key to determining that rate of
new drug discoveries, and in their study of the phar-
maceutical industry Cardinal and Hatfield (2000)
found that firms with a greater emphasis on R&D
spending were more productive generating inventions,
as measured by patents, than firms with lower levels of
R&D spending. A strong correlation between R&D
spending and patents has also been found in the
chemical (Ahuja and Katila, 2001) and computer
(Hagedoorn and Duysters, 2002) industries. More re-
cently, in their study of 150 manufacturing and service
firms, Peeters and van Pottelsberghe de la Potterie
(2006) found that firms that devote greater effort to
basic and applied research experience higher levels of
patenting.
Whereas the previous results support predications
for a positive effect of R&D spending on the level of
firm invention as measured by its patenting activity,
others have suggested that the relationship between a
firm’s commitment to R&D spending and patenting
activity is more nuanced and complex and theorize
that firms experience decreasing returns to their R&D
spending (Acs and Audretsch, 1990). One explanation
for the possible diseconomies of size for invention is
that the decision making, coordination, and resource
allocation processes in large firms are more inefficient
than in small firms. Thus, each additional dollar of
research yields less in the way of creative outputs
(Adams and Brock, 1986). As firms age, they tend to
become more conservative as the influence of the
group of founding entrepreneurs is diminished and
replaced by professional managers, ultimately making
728 J PROD INNOV MANAG
2010;27:725–740
it more difficult for truly inventive ideas to emerge
(Graves and Langowitz, 1993). Managers also face
increasing time demands overseeing existing product
lines and, as a result, devote less time to developing
new products. The reduction in the amount of ‘‘en-
trepreneurial attention’’ (Acs and Gifford, 1996,
p. 216) devoted to creating new inventions has been
found to constrain the overall innovative capability
of larger firms. These arguments are supported by
empirical research that finds declining innovative
productivity with respect to R&D. Both Cohen and
Klepper (1996) and Acs and Audretsch (1990) dem-
onstrated that productivity in innovation tends to de-
cline with firm size. Also, Graves and Langowitz
found evidence that increasing levels of R&D spend-
ing was counterproductive in terms of innovative out-
put in the pharmaceutical industry, and Jensen (1987)
found that firm size was not related to marginal in-
novative productivity. Consistent with this empirical
evidence, the following hypotheses posits a positive
relationship between R&D spending and invention—
as measured by patents (Ahuja and Lampert, 2001;
Pakes, 1985). However, it is recognized that this rela-
tionship may not be so straightforward and indeed
that returns to R&D spending may decline as spend-
ing rises:
H1a: R&D spending is positively related to the
number of firm patents.
H1b: Firms experience decreasing returns to R&D
spending with respect to the number of firm
patents.
Much as R&D spending is expected to stimulate
firm invention, it is also anticipated that it will result
in more innovation, as measured by new product an-
nouncements. While a firm’s R&D spending is ex-
pected to stimulate inventive activity, for many firms
its primary purpose is to develop inventions that are
transformed into commercializable products. This
centrality of R&D spending to new product develop-
ment is noted by Penner-Hahn and Shaver (2005, p.
123) who state that ‘‘firms undertake R&D activities
in large part to create innovations that will ultimately
provide new products and therefore profits.’’ While
the effectiveness of innovation for a firm depends on
the technological capabilities that reside in its research
and development function, successful innovation is
not guaranteed (Tsai, 2005). A firm may have ‘‘great
technological and inventive potential, but be relatively
unsuccessful in the commercialization of its product’’
(Fleming, 2002, p. 1064). In the absence of a strong
K. W. ARTZ ET AL.
link between R&D spending and the successful intro-
duction of new products, the ability of a firm to con-
tinue to grow and develop is unlikely (Nerkar and
Roberts, 2004).
Empirical evidence supports the idea that a link
exists between a firm’s R&D spending and the number
of new products introduced in the market. In their
study of 250 firms in the United States, Hitt et al.,
(1996) found that a firm’s level of R&D spending was
positively correlated with its new product announce-
ments, and Zahra (1993) found that a strategy that
emphasized growth through internal commitment to
R&D spending was positively related to the number
of new product introductions. McMillan et al. (2003)
examined the U.S. pharmaceutical industry and found
that a firm’s R&D spending was a significant predic-
tor of the number of new products it developed. Sim-
ilarly, Langowitz and Graves (1992) found a positive
relationship between R&D spending and new prod-
ucts in the pharmaceutical industry.
Consistent with these earlier studies, this study ex-
pects to find that greater spending on R&D should
translate into the development of a greater number of
products. It is also anticipated that, just as was pre-
dicted in the relationship between R&D spending and
patents, the relationship between R&D spending and
new product announcements will be nonlinear. This
nonlinear prediction is supported by some empirical
work. For example, Audretsch and Acs (1991) exam-
ined 1,700 U.S. firms and found a U-shaped relation-
ship between firm size and innovative activity,
measured as the number of new product introduc-
tions. In addition, Tsai (2005) found a U-shaped re-
lationship between R&D productivity, measured as
R&D output elasticity, and firm size, and Peeters and
van Pottelsberghe de la Potterie (2006) found the re-
lationship between firm age and innovation activity to
be U-shaped in their examination of 1,300 Belgian
firms. While none of these studies directly examine the
focal variables that are of interest here, they do sug-
gest the likelihood of a nonlinear relationship in an
examination between commitment to R&D spending
and innovative output.
More directly related to this study, both Acs and
Audretsch (1987, 1988) and Graves and Langowitz
(1993) found that increasing R&D spending yields
decreasing returns as measured by the number of new
products. Similar to the arguments leading to H1b,
these researchers suggest that as R&D spending in-
creases so do bureaucracy and inefficiency, thus re-
ducing creativity and slowing efforts to introduce new
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION
products to market. Related to this, they argue that
the most talented and creative individuals can become
frustrated with their lack of autonomy in large re-
search and development operations and may leave for
smaller, less bureaucratic firms. Drawing from these
arguments, it is anticipated that R&D spending will
increase new product announcements, although these
returns will decrease with increased R&D. Stated
more formally:
H2a: R&D spending is positively related to new
product announcements.
H2b: Firms experience decreasing returns to R&D
spending with respect to product announcements.
While R&D spending is directed at both inventions
and innovations, there are also links between a firm’s
inventions and its product innovations. Researchers
have pointed out that invention is an important an-
tecedent of new product development (Trajtenberg,
1990) and may play a role in stimulating further in-
novative activity (Mazzoleni and Nelson, 1998; Rai,
2001). By imposing a legal restriction on the use of
new knowledge embedded in new inventions, patents
have generally been viewed as a valid instrument to
allow inventors to recover the cost of their creative
efforts and to encourage the introduction of new
products (Encaoua, Guellec, and Martinez, 2006). It
should be recognized, however, that because of the
expense involved not all inventions are patented.
Moreover, not all inventions that are patented will
result in marketable products, as the potential eco-
nomic significance of patented products varies signifi-
cantly. Firms are more likely to patent inventions that
demonstrate potential to be commercially exploited.
Therefore, a link is expected to exist between firm
patenting propensity and the products it ultimately
brings to market (Ernst, 2001).
Empirical investigations into the relationship be-
tween the number of patents held by a firm and the
number of new products that it introduces have largely
supported a positive association. McMillan et al.
(2003) found that the number of patents a firm con-
trolled was positively related to its development of new
products. While supporting the overall positive link
between patents and new products, the fact that their
study was limited to the pharmaceutical industry raises
questions concerning the generalizability of their find-
ings. Therefore, the present study examines the same
question but broadens the context and applicability of
the findings through the multi-industry sample.
J PROD INNOV MANAG 729
2010;27:725–740
H3: Patents are positively related to product
announcements.
The Relationship between Innovation Outputs and
Performance
It is important to understand how a firm’s R&D
spending is related to its innovative activities (i.e., in-
ventions and product introductions) as well as the re-
lationship between inventions and production
innovations. However, for a firm to improve its com-
petitive position those outputs must also have a ben-
eficial effect on firm performance.
Theoretically, product innovations may allow the
innovator to at least briefly earn monopoly profits
(Lieberman and Montgomery, 1988; Schumpeter,
1950). As innovative new products are introduced to
the market, they initially face little direct competition
and are able to generate high profits. However, the
relatively high profits attract other firms, thus increas-
ing competition and over time reducing profits. While
Schumpeter argues that the return from innovative
new products will initially be high before tapering off,
firm-level profits may not follow the same course. In-
deed, while high profits from any single innovation
may be transitory, relatively high firm-level profits
may persist over time if a firm can successfully intro-
duce a stream of new products. In effect, a series of
monopoly profits are earned by a firm if it is able to
regularly introduce new and innovative products
(Montgomery, 1995).
The argument for a positive relationship between
firm innovativeness and performance has been gener-
ally validated in numerous studies. For example, in
his study of firms in the U.S. pharmaceutical industry,
Roberts (1999) found that the innovative propensity
of a firm positively influences the degree to which
above-average profits (return on assets; ROA) persist
over time, and in their examination of biotechnology
firms DeCarolis and Deeds (1999) found a positive
relationship between the number of products that
biotechnology firms had in their pipeline and market
valuation on the day of an initial public offering. Cho
and Pucik (2005) argue that firm innovativeness is
positively related to firm growth and firm profitabil-
ity. Their empirical examination analysis of Fortune
1000 firms supported their argument. More recently,
Hua and Wemmerlov (2006) examined the relation-
ship between the rate of new product introduction and
730 J PROD INNOV MANAG
2010;27:725–740
performance. Their examination of the personal com-
puter industry confirmed a positive relationship be-
tween rate of new product introduction and
performance, thus providing support for the argu-
ment that firms introducing a consistent stream of
innovative products to the market can achieve sus-
tained levels of high performance.
While these studies have focused on manufacturing
firms in the U.S. market, other researchers have con-
firmed the innovation–performance link in other con-
texts. For example, in their research of service firms in
Greece and Australia, Salavou (2002) and Prajogo
(2006) found that product innovation was an impor-
tant determinant of firm growth and profitability.
Moreover, other research has also confirmed that
more innovative firms tend to have higher perfor-
mance (Geroski, Machin, and Van Reenan, 1993;
Klette, 1996; Li and Atuahene-Gima, 2001; Price,
1996; Wheelwright and Clark, 1995).
H4: Product announcements are positively related to
performance.
While this research suggests that innovation output
can enable a firm to improve performance, it does not
necessarily follow that the firm will capture all of the
potential benefits from the innovation (Anton and
Yao, 2004; Teece, 1996). The appropriability of an
innovation is also determined by the effectiveness of
legal protection mechanisms such as patents. While
approved patents vary widely in their significance,
patents have generally been regarded as a useful in-
strument to grant inventors temporary exclusionary
rights and allow them to recapture the value of their
development efforts (Bogner and Bansal, 2007; En-
caoua et al., 2006). Indeed, firms often seek patents as
soon as feasible in the product development process in
an effort to delay the ability of competitors to imitate
the product and therefore to extend the period of time
the original inventor can earn abnormal profits (Lee et
al., 2000; McMillan et al., 2003). Some empirical ev-
idence does exist supporting the contention that a
firm’s patenting activities are related to its perfor-
mance. For example, in his study of the German ma-
chine tool industry, Ernst (2001) found evidence that
patents are effective instruments for protecting tech-
nological inventions and have a positive impact on
firm sales. Mann and Sager (2007) also found that
patenting in small software firms is positively corre-
lated with firm longevity, although they did not di-
rectly examine any performance metrics.
K. W. ARTZ ET AL.
While these theoretical arguments and empirical
evidence suggest that patents can have a positive im-
pact on firm performance, there is also considerable
evidence that in many contexts patents do not work in
practice as well as they do in theory. In two well-
known studies conducted in 1983 and 1994 (i.e., the
‘‘Yale’’ and ‘‘Carnegie Mellon’’ studies), patents were
reported by R&D managers in semiconductors to be
among the least effective mechanisms for appropriat-
ing the returns from R&D spending (Hall and Ziedo-
nis, 2001; Levin et al., 1987). Other researchers have
suggested that, although it is feasible for patents to
play an important role in improving firm perfor-
mance, this positive relationship is actually observed
in only a relatively small number of industries. For
example, Mansfield (1986) examined the patenting
practices of U.S. manufacturing firms and found
that patents were important to innovation perfor-
mance in a limited number of industries such as phar-
maceuticals and chemicals but that patents were
relatively unimportant in other sectors such as elec-
trical products, primary metals, instruments, and the
like. Griliches, Hall, and Pakes (1991) examined the
patenting practices of 340 U.S. firms in influencing a
firm’s change in market value and found that patent
variables have virtually no influence on performance.
Additional support was provided by Arora, Ceccag-
noli, and Cohen (2003). Using the data from the Car-
negie Mellon survey, they found that the additional
return associated with a patented versus an unpat-
ented invention was positive in only a few industries
such as drugs and biotechnology.
There are numerous explanations given for patent
ineffectiveness in improving firm performance. These
explanations frequently include the fact that patents
can often be invented around relatively cheaply and
that the cost of upholding their validity or proving
that the patent had been infringed upon is too high
(Encaoua et al., 2006; Teece, 1996). For these reasons,
the patent system may serve a few industries such as
pharmaceuticals well. However, for firms in other in-
dustries, particularly small firms, the beneficial effect
of patenting on performance is elusive (MacDonald,
2004).
Moreover, some researchers argue that the intent
of patenting for many firms has evolved so that the
goal of patenting is no longer simply to encourage
innovation by allowing inventors a temporary mo-
nopoly from which to earn a return on their invest-
ments. There has been a large increase in the number
of U.S. patents over the past two decades (Cohen,
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION
Nelson, and Walsh, 2000; Ziedonis, 2004). Nonethe-
less, the intent of many of these new patents is not
necessarily to protect a firm’s own innovation efforts
but rather to play a more strategic role in firm com-
petitiveness. Such practices as patent stacking (Heller
and Eisenberg, 1998), clustering (Rivette and Kline,
2000), and network arrangements (Kretschmer and
Soetendorp, 2001) are responsible for a significant
portion of the increase in patents but have little to do
with encouraging a firm’s own innovation and much
to do with blocking a competitor’s innovation efforts
(MacDonald, 2004). It has also been suggested that,
because of the increased strategic importance of pat-
ents as a competitive tool, a significant amount of
patenting may be defensive in nature, where patents
are taken out solely to preempt a competitor working
in an area. This role of patents as ‘‘competitive posi-
tioning’’ mechanisms, combined with courts expand-
ing what can be patented, forces many firms to patent
things they normally would not and has little imme-
diate impact on firm performance (ibid.).
Therefore, although a positive link between
patents and new product announcements efforts is
hypothesized, it is less clear that there is a direct
relationship between a firm’s patenting practices and
its performance. As Hall and Ham (1999, p. 9) state,
‘‘The reasons that patents are important often has
little to with whether patents provide an incentive to
conduct R&D or enable the firm to profit from the
generation of products on which the invention was
based.’’ Based on the previous discussion, patents
are not expected to be a significant predictor of firm
performance:
H5: Patents are not directly related to performance.
Methods
The present study traces the R&D spending, patents,
new product announcements, and performance of a
panel of firms. Performance outcomes are tracked
from 1986 through 2004, and other measures are
lagged. The corporations for this study are drawn
from COMPUSTAT North America, a database of
financial information on U.S. and Canadian publicly
held companies.
To minimize reporting problems that are often as-
sociated with R&D spending in COMPUSTAT
(Bound et al., 1984) and to focus on larger firms
with material R&D expenses, the sample was limited
J PROD INNOV MANAG 731
2010;27:725–740
to firms that reported at least $10 million in R&D
spending during the first five years of the time span
studied. This provides a sample of 272 firms for 19
one-year periods.
Measures
Research and Development. Firm expenditures on
research and development each year were measured
using data from COMPUSTAT.
Innovative Activity. Two measures of innovation
activity were used. The first measure, which represents
inventions by a firm, was the number of patents
granted to a firm each year. Patent data were gath-
ered from the National Bureau of Economic Research
(NBER) Patent Citation Data Files (Hall, Jaffe, and
Trajtenberg, 2001) and the Patents BIB from the U.S.
Patents and Trademark Office (NBER Patent Cita-
tion Data Files can be accessed at http://www.nber.-
org/patents/, and information about Patent BIB can
be found at http://www.uspto.gov/web/offices/cio/cis/
prodsvc.htm). The second measure representing prod-
uct innovation efforts by a firm was the number of
new product announcements each year. These data
were gathered from Factivia (a Dow Jones & Reuters
Company providing full-text access to more than
9,000 magazines, trade journals, newspapers, and
newswires as well as company and industry reports
and websites) and was checked against the older F&S
Predicast new product announcement data. The an-
nouncements are introductions, reviews, previews, or
announcements of a new product or service. They do
not include products still in the early developmental
stages or the opening of new facilities such as factories
or retail stores. The count is only for unique
announcements.
Performance. Because performance is a multidi-
mensional construct (Murphy, Trailer, and Hill,
1996), two different aspects of firm performance in
this study are measured: returns and growth. Innova-
tive activities in firms should increase returns as well
as stimulate growth. The first measure reported here,
after-tax ROA, is a measure of current returns. While
discussions concerning appropriate measures of firm
profitability are widespread (e.g., Scherer and Ross,
1990; Venkatraman and Ramanujam, 1986), ROA is
a widely used profitability measure in innovation
studies (Roberts and Amit, 2003; Sher and Yang,
732 J PROD INNOV MANAG
2010;27:725–740
2005) and captures the ability of a firm to develop
profits from its asset or investment base (no matter
whether the source of the investment was equity or
debt). In addition, the extent to which a firm’s inno-
vative activities are stimulating revenue growth is as-
sessed by measuring average sales growth over a
three-year period. Data for both performance mea-
sures were obtained from COMPUSTAT.
Industry Controls. While patents may play a key
role in protecting a firm’s output stemming from its
innovative activity, researchers have also argued that
patents play a more important protection role in some
industries (e.g., chemical products, pharmaceuticals)
than in others (e.g., motor vehicles, rubber and tex-
tiles) (Arora et al., 2003; Bettis and Hitt, 1995;
Comanor and Scherer, 1969; MacDonald, 2004;
Mansfield, 1986).
A total of 35 industries classified by primary two-
digit standard industrial classification (SIC) codes are
in the sample. The majority of innovation activity is
clustered in just nine industries. These industries ac-
count for 91% of the total product announcements
and 83% of the total patents during the time period
studied. These nine industries and their respective
two-digit SIC are food and kindred products (20),
paper and allied products (26), chemicals and allied
products (28), fabricated metals (34), industrial and
commercial machinery and computer equipment (35),
electronic, electrical equipment and components (36),
measurement/analyzing/control instruments, trans-
portation equipment (37), photographic/medical/op-
tical goods, watches/clocks (38), and business services
(73). Dummy variables for each of these industries
were included in the models tested.
Firm Size. Firm size was initially used as a control
variable. However, R&D spending and firm size were
significantly correlated (r 5 0.75). Thus, because of
multicollinearity problems, firm size was dropped
when R&D spending was included in an equation.
Data Analysis
Several of the variables, including patents, products,
and R&D, were transformed because of error term
skewness problems. The model suggests a more com-
plex relationship than can be modeled using multiple
regression models. Therefore, a three-stage least
squares (3SLS) analysis was used to test the complete
K. W. ARTZ ET AL.
model at one time. To control for multiple observa-
tions per firm, firm dummy variables were included in
each equation. Dummy variables were also added to
control for the year(t). The equations tested are as
follows:
PerformanceðtÞ ¼ B0 þ B1ðPatentsðt  2ÞÞ
þB2ðProduct Announcementsðt  1ÞÞ
þB3ðFirm SizeÞ þ B4ðPerformanceðt  1ÞÞ
þIndustry Controls þ Firm Dummies
þYear Dummies þ Error Term
Product Announcementsðt  1Þ ¼ B0 þ B1ðPatentsðt  2ÞÞ
þB2ðR&Dðt  3ÞÞ
þB3ðR&Dðt  3ÞÞ2
þIndustry Controls
þFirm Dummies
þYear Dummies þ Error Term
Patentsðt  2Þ ¼ B0 þ B1ðR&Dðt  3ÞÞ
þB2ðR&Dðt  3ÞÞ2 þ Industry Controls
þFirm Dummies þ Year Dummies
þError Term
Note that R&D spending was lagged by three years,
patents by two years, and product announcements by
one year. Lags among R&D spending, innovation ac-
tivities, and performance are common in innovation
studies (e.g., Ernst, 2001; Langowitz and Graves, 1992;
Masayuki, 1999). These lags were chosen because of
previous findings. For example, Ernst found that pat-
ents had a two- to three-year lag in their effect on sales.
Each of the performance measures in the study—ROA
and sales growth—was used as the dependent variable
in separate regression analyses. Time-series regressions
were also run to test the relationships between R&D
and each of the two indicators of innovative activities,
patents and product announcements. However, time-
series analysis did not allow all equations to be simul-
taneously tested. The relationships between R&D and
patents and between R&D and product announce-
ments in these regressions are consistent with findings
from the 3SLS models reported here. A one-year
lagged performance in each model was also included
because a firm’s current performance depends to some
extent on its past performance.
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION
Results
The correlation matrix is shown in Table 1. Product
announcements and patents are positively correlated,
which is not surprising given that both are indicators
of a firm’s innovative activities. Similarly, R&D
spending is positively correlated with both product
announcements and patents. Not surprisingly, the two
performance measures—ROA and sales growth—are
positively correlated.
Tables 2a and 2b contain the results of the struc-
tural models tested using 3SLS regressions. The first
model (Table 2a) examines ROA as the outcome
variable in the third equation of the analysis. The
second model (Table 2b) examines three-year sales
growth in the third equation of the analysis. In both
cases, H1a is supported, but the evidence does not
lead to support of H1b. R&D spending is positively
associated with patents (H1a), but the significant
quadratic term indicates a positive curvilinear rela-
tionship between R&D spending and patents (oppo-
site of the predicted relationship in H1b). H2a and
H2b are not supported. While a significant curvilin-
ear relationship exists between R&D spending and
product announcements, it is not the predicted in-
verse-U relationship. Instead, as R&D spending ini-
tially increases, new product announcements drop;
however, product announcements begin to increase
as R&D spending climbs. Industry differences were
evident with respect to the equations for patents and
product announcements.
H3, which predicted that patents would be posi-
tively associated with product announcements, was
supported in both analyses. H4, which predicted that
product announcements would be positively associ-
ated with performance, was supported for both ROA
and sales growth. H5, which predicted no direct
relationship between patents and performance, was
not supported in either analysis. Patents were found
Table 1: Correlation Matrixa
Variable Mean s.d. 1.
1. Patentsb 3.20 1.62 1.00
2. Productsb 2.39 1.47 0.51
3. R&Db 4.27 1.48 0.77
4.Firm Sizeb 2.80 1.20 0.68
5. ROA 4.51 9.61 0.10
6. Sales Growth 7.04 12.61  0.14
a
n 5 4,002. R&D, research and development. ROA, return on assets.
b
These variables are log transformations.
 po.001.
J PROD INNOV MANAG 733
2010;27:725–740
to be negatively associated with both ROA and sales
growth. Firm size was not related to ROA but was
positively related to sales growth. In each model,
lagged performance was significantly related to cur-
rent performance.
Discussion
The primary purpose of this paper was to explore the
relationship between a firm’s R&D spending and its
outputs in terms of inventions and innovations and
the impact of those outputs on firm performance.
Several of the results support previous empirical find-
ings and are in line with the hypotheses. However, the
model of simultaneous equations revealed some sur-
prising findings. Of note are results showing that a
firm’s R&D spending is a very good predictor of its
patenting and new product announcements, although
not always in the anticipated direction. Another sur-
prising result is the negative relationship between pat-
ents and performance.
As expected, R&D spending was positively related
to patents. This finding is consistent with others (e.g.,
Bogner and Bansal, 2007; Cardinal and Hatfield,
2000) who argue that internal research capabilities,
particularly those with a strong basic research com-
ponent, is key to enabling a firm to generate creative
outputs. The finding of increasing returns to scale to
R&D spending was surprising. In formulating H1b,
the present study drew heavily from growing evidence
that suggests larger firms are proportionally less in-
novative than smaller firms. While the number of pat-
ented inventions has been found to rise with increased
spending on research and development, this occurred
at a decreasing rate (e.g., Graves and Langowitz,
1993). In other words, the most common finding has
been one of decreasing returns to scale of R&D spend-
ing on patenting.
2. 3. 4. 5. 6.
1.00
0.67 1.00
0.48 0.74 1.00
0.09 0.11 0.16 1.00
0.01  0.13  0.02 0.25 1.00
734 J PROD INNOV MANAG K. W. ARTZ ET AL.
2010;27:725–740

Table 2a: Three-Stage Least Squares Regression Models

Variable Coefficient Z Hypothesized Sign
a
DV: ROA
Chi2 5 2355.37
Intercept  26.60  4.26
Products 3.52 2.62 H4 ( þ )
Patents  4.53  3.73 H5 (No Relationship)
Firm Size 0.03 0.06
Lagged ROA 0.21 11.85
a
Industry dummies for all industries, except for industrial/commercial machinery & computer equipment (35), are positive and significant at po.05
or greater. Year dummies for 1987, 1988, 1991, 1994, 1995, 1996, and 1997 are positive and significant at po.05 or greater. Year dummy for 2002 is
negative and significant at po.05. ROA, return on assets.

DV: Productsb
Chi2 5 11685.73
Intercept  0.31  0.55
Patents 1.29 8.31 H3 ( þ )
R&D Spending  0.78  8.65 H2a ( þ )
R&D Squared 0.04 4.38 H2b (  )
b
Industry dummies for food products (20), metals (34), and measure/analyze/control instruments (38) are positive and significant at po.05 or
greater. Year dummies for 1987, 1989, 1990, 1991, 1992, 1993, 1999, 2002, 2003, and 2004 are positive and significant at po.05 or greater. Year
dummies for 1996 and 1997 are negative and significant at po.05 or greater. R&D, research and development.

DV: Patentsc
Chi2 5 33500.30
Intercept 1.52 5.23
R&D Spending 0.32 6.20 H1a ( þ )
R&D Squared 0.04 6.93 H1b (  )
c
Industry dummy for paper products (26) is positive and significant at po.05. Industry dummies for food products (20), metals (34), industrial/
commercial machinery & computer equipment (35), and measure/analyze/control instruments (38) are negative and significant at po.05 or greater.
Year dummies for 1999 and 2004 are negative and significant at po.05 or greater. R&D, research and development.
 po.01.
 po.001.

The result showing increasing returns to scale con-
tradicts much of the existing empirical evidence but is
consistent with economic arguments for the advanta-
ges of scale in innovation (see Acs and Audretsch,
1990). For example, a large-scale research effort may
be necessary for a firm to pursue enough leads to find
those that can result in patentable inventions (Graves
and Langowitz, 1993). Moreover, Hill and Hansen
(1991) suggest that larger research labs enjoy risk-
spreading benefits unavailable to smaller labs. As the
research and development function increases in size,
the possibility of risk reduction across a portfolio of
projects enables managers to increasingly pursue a
wider range of inventions. Others have argued that as
research and development departments continue to
grow their growing access to internal funds gives them
significant advantages in purchasing specialized labo-
ratory equipment or hiring specialized personnel re-
quired to facilitate a broad R&D portfolio (Acs and
Audretsch). While the results reported here support
these explanations, it is also possible that increasing
returns may be attributable to the overall increase in
patenting practices in firms. As firms spend more on
research and development, they are likely to focus on
patenting more—the inventions that they develop and
intend to capitalize on and defensive patents to pro-
tect their strategic position but that may not neces-
sarily be related to specific proprietary products that
can generate returns. If the firm’s focus is on quantity,
a patent arms race, or on defensive maneuvers rather
than on patents that are useful in conjunction with
other firm-specific resources, the pattern found in the
present data would emerge.
Also interesting is the finding that while a signifi-
cant curvilinear relationship exists between R&D
spending and product announcements it is not the
predicted inverse-U but instead a U-shaped relation-
ship. As R&D spending initially increases, new prod-
uct announcements drop. At high levels of R&D
spending, however, product announcements begin to
climb. While these results seem to contradict the pre-
ponderance of existing evidence some research exists
that support the findings. For example, a U-shaped
relationship has been found between firm size and in-
novative activity, measured as the number of new
product introductions (Audretsch and Acs, 1991); be-
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION J PROD INNOV MANAG 735
2010;27:725–740

Table 2b: Three-Stage Least Squares Regression Models

Variable Coefficient Z Hypothesized Sign
a
DV: 3Yr Sales Growth
Chi2 5 5358.34
Intercept 17.92 1.96
Products 9.81 3.33 H4 ( þ )
Patents  17.91  6.46 H5 (No Relationship)
Firm Size 6.10 6.31
Lagged Sales Growth 0.58 29.68
a
Industry dummy for paper products (26) is positive and significant at po.05. Industry dummies for food products (20), chemical and pharma-
ceutical products (28), metals (34), and industrial/commercial machinery & computer equipment (35) are negative and significant at po.05. Year
dummies for 1994, 1995, 1996, 1997, and 2000 are positive and significant at po.05.

DV: Productsb
Chi2 5 11647.25
Intercept  0.31  0.56
Patents 1.30 8.36 H3 ( þ )
R&D Spending  0.78  8.68 H2a ( þ )
R&D Squared 0.04 4.34 H2b (  )
b
Industry dummies for food products (20), chemical and pharmaceutical products (28), transportation equipment (34), electronic, electrical equip-
ment and components (36), and measure/analyze/control instruments (38) are positive and significant at po.05 or greater. Year dummies for 1989,
1990, 1991, 1992, 1993, 1999, 2002, 2003, and 2004 are positive and significant at po.05. Year dummies for 1995 and 1996 are negative and
significant at po.05. R&D, research and development.

DV: Patentsc
Chi2 5 33515.80
Intercept 0.33 0.85
R&D Spending 0.32 6.21 H1a ( þ )
R&D Squared 0.04 6.92 H1b (  )
c
Industry dummy for paper products (26) and transportation equipment (34) are positive and significant at po.05. Industry dummies for chemical
and pharmaceutical products (28), industrial/commercial machinery & computer equipment (35), and business services (73) are negative and sig-
nificant at po.05. Year dummies for 1999 and 2004 are negative and significant at po.05 or greater. R&D, research and development.
 po.05.
 po.01.
 po.001.

tween R&D productivity, measured as R&D output
elasticity, and firm size (Tsai, 2005); and between firm
age and innovation activity (Peeters and van Pot-
telsberghe de la Potterie, 2006).
While none of these studies directly examined the
relationship between R&D spending and new product
announcements, cumulatively they support the re-
sults. Small firms, with relatively low expenditures
on research and development, may have a competitive
advantage in R&D productivity. While R&D spend-
ing may be limited, small firms are relatively efficient
in decision making and coordination, allowing them
to rapidly respond to market needs and quickly de-
velop and launch new products. At the other end of
the spectrum, firms able to support high levels of
R&D spending can also achieve high levels of inno-
vative output as they take advantage of economies of
scale to spread costs, can sustain a diverse portfolio of
research projects, and are able to effectively gather
and use a broad range of internal and external knowl-
edge that can accelerate product innovation (Tsai,
2005). It may also be that our findings are related to
the difference between spending on basic research and
spending on product development efforts. At very low
levels of R&D spending more of the expenditures tend
to be directed at development of projects that have a
relatively high likelihood of producing commercializ-
able products that can provide immediate payback for
the firm. Thus, the level of new product innovation
would be relatively high for low levels of R&D spend-
ing. As R&D spending begins to increase, the addi-
tional funds are likely to be disproportionally directed
toward basic research, possibly resulting in fewer
product innovations. Eventually, as firms continue
to grow and expand their R&D spending, the portfo-
lio of commercializable products grows and the level
of product innovation rises. Unfortunately, the data
used here do not allow a separate evaluation of the
research and development components of R&D
spending. Future studies may shed more light on
736 J PROD INNOV MANAG
2010;27:725–740
these issues and relationships by gathering more fine-
grained data.
It was also hypothesized and found that product
announcements would be positively related to both
performance measures. These results are consistent
with previous work (e.g., Hua and Wemmerlov, 2006;
Roberts, 1999) and suggest that firms that can gener-
ate a consistent flow of new products to the market
enjoy higher levels of performance. While the
improved performance that may result from a single
product introduction may not be long-lived, this
research supports the argument that high profits
can persist if a firm is able to successfully introduce
to the market multiple innovations over an extended
period of time. These multiple product introductions
may allow a firm to continually enjoy brief mono-
poly products from each of the new products it intro-
duces. Moreover, researchers also argue that persis-
tent high levels of performance by a firm act as
an entry-deterring mechanism, effectively reducing
the number of firms and level of competition in an
industry and allowing the innovating firm to capture
more of the industry’s sales and profits (Cho and
Pucik, 2005).
It was also expected that patents would not be re-
lated to performance. This expectation was based on
research suggesting that many patents provide only
limited protection or were created for strategic pur-
poses only distantly related to firm’s own innovation
efforts (Arora et al., 2003; Griliches et al., 1991). The
fact that a negative relationship was found between
patents and both ROA and sales growth does not
support the hypotheses, but it is intriguing. Certainly,
these results call into question the value of patents as
protection mechanisms. While it is likely that patents
help firms recoup some of their research and devel-
opment costs, there is no evidence of overwhelming
direct performance benefits. The results do suggest,
however, that patents may boost firm performance
indirectly through their positive effect on product in-
troductions. In addition, while it was argued that
firms are most likely to patent commercializable prod-
ucts, not all patented technologies are actually con-
verted into products. It is possible that patenting
erodes a firm’s competitive position as managers in
the firm may feel invincible against the competition
and thus do not develop other complementarities and
skills needed to compete (e.g., management, produc-
tion, and marketing). A positive relationship was
found between patents and new product announce-
ments. Yet the technological and economic impact of
K. W. ARTZ ET AL.
patents can vary greatly, with only a relatively small
number of patents being of such impact that they
generate significant economic returns (Schankerman
and Pakes, 1986). When one considers that the pro-
cess of creating and defending patents is very costly
(Encaoua et al., 2006), the combination of high levels
of expensive patenting activity combined with low
returns from those patents can explain the present
study’s results.
The problem of high-cost patenting providing lim-
ited economic benefit is exacerbated by the trend to-
ward strategic patenting, where the value of patents is
independent of the actual, or even potential, value of
any innovation (MacDonald, 2004). An increasing
number of firms are using patents as strategic weap-
ons. For example, MacDonald highlights numerous
examples of strategic patenting that may limit the
economic benefits a firm achieves. These include ex-
tensive patenting around a competitor’s key patents
to limit the value of its patents, building an extensive
patent portfolio around technologies of limited value
to provide leverage to negotiate licensing agreements,
and engaging in high levels of defensive patenting that
require a significant number of patents be taken out to
prevent rivals from using their patents or to prevent
them from working in an area. These patent strategies
not only reduce the likelihood of creating potential
high-value innovations that can positively impact re-
turns and growth but also force all firms to engage in
high levels of expensive patenting that provides lim-
ited economic return. While it is possible that exten-
sive patenting serves a few industries well, the overall
effect for many firms from high levels of patenting is
to reduce performance.
Firm size was found to be positively correlated with
patents, product announcements, and R&D spending.
This is not surprising, as large firms have more re-
sources to devote to generating innovative activity.
Firm size was also positively related to sales growth,
although not to ROA. This suggests that while an
overall higher level of innovative activity results in
significantly higher sales it does not translate into dis-
proportionally higher return, perhaps because of
greater inefficiencies in larger firms.
Limitations
Two limitations of this study also point to future re-
search opportunities. This study used simple patent
counts. This measure indicates the quantity of pat-
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION
enting activity without taking into account the impact
of these various patents. The inability of patent
counts to distinguish between high-impact and low-
impact patents is well documented (e.g., Hall et al.,
2001; Trajtenberg, 1990). However, Hagedoorn and
Cloodt (2003, p. 1368) conclude that ‘‘it appears that,
certainly in large parts of the economics literature,
raw patent counts are generally accepted as one of the
most appropriate indicators that enable researchers to
compare the inventive or innovative performance of
companies in terms of new technologies, new pro-
cesses and new products.’’ The use of patent counts
and patent citations, highly correlated in some studies
(e.g., Hagedoorn and Cloodt; Stuart, 2000) but not in
others (e.g., Rosenkopf and Nerkar, 2001), tap into
different aspects of a firm’s inventive activities (quan-
tity vs. impact). Both aspects are worthy of study. The
empirical findings presented here suggest that the ab-
solute level of patenting can detract from firm returns
and growth, a finding that is important in light of re-
cent increases in patenting, particularly defensive pat-
enting. Future studies should examine the role of
patent impact. It is expected that higher patent im-
pact may mitigate some of the negative effects found
in the present study.
Given the large size of the sample, this study relied
solely on archival data. This did not allow for a
disaggregation of R&D spending into finer compo-
nents. Survey data allow researchers to determine
what percentage of a firm’s R&D spending is directed
toward various types of activities. More specifically,
surveys can separate the percentage of R&D spending
associated with basic and applied research rather than
development. Furthermore, surveys allow for a
similar distinction between innovation efforts directed
at product development and efforts involving process
development (e.g., Lager, 2002; Peeters and van
Pottelsberghe de la Potterie, 2006). Prior research
suggests that firms vary in their relative emphasis
on these elements of R&D spending and that innova-
tive outputs vary as a result. For example, Peeters
and van Pottelsberghe de la Potterie found that firms
were more likely to patent when they emphasized
product rather than process innovation and
when they had a greater emphasis on basic and
applied research rather than development. Their
study, however, did not examine performance
outcomes. Future studies should use the fine-grained
data available from surveys to further explore the
relationships between firm innovative activities and
firm performance.
J PROD INNOV MANAG 737
2010;27:725–740
Implications
These empirical findings have implications both for
managers and researchers. For managers, there does
appear to be increasing return to R&D spending with
respect to patents. Large research and development
efforts can realize benefits in terms of lower risk,
broader technology portfolios, more specialized tal-
ent, and the like that smaller labs may not. The ad-
vantage of higher levels of R&D spending is also
reflected in a greater number of new products intro-
duced to the market. Yet even firms with relatively
low levels of R&D spending can experience high in-
novative output if they focus on remaining efficient
and rapidly responding to changing market demands
with new products.
The importance of new products to a firm is also
highlighted by the finding that product announce-
ments were significant in determining a firm’s sales
growth as well as its profitability. This finding supports
other research suggesting that while the performance
benefit of any one innovation may be short-lived mul-
tiple product innovations over time can consistently
improve firm performance. Finally, the results provide
a cautionary tale for managers as they consider their
patenting practices. Certainly, to some extent patents
have value as devices to protect proprietary technol-
ogies. While not all of these patented technologies will
result in significant economic returns, patents do limit
the extent to which rival firms may encroach in an
area and can extend the time a firm has to exploit it
technologies. Yet the fact that patents are negatively
related to growth and returns suggest that firms need
to reexamine the way they are managing their patent-
ing process. The fact that managers have expanded
their use of patents in ways that were never originally
intended may be having unanticipated consequences.
Certainly, the results of this one study do not provide
conclusive evidence, and additional research is needed
to examine in greater detail and in different contexts
the patent–performance link. However, it is interest-
ing that rather than enhancing innovation and im-
proving performance as patents were originally
intended, they are now being used to constrain inno-
vation and are reducing performance.
References
Acs, Z.J. and Audretsch, D.B. (1987). Innovation, Market Structure,
and Firm Size. Review of Economics and Statistics 69(4):567–575.
738 J PROD INNOV MANAG
2010;27:725–740
Acs, Z.J. and Audretsch, D.B. (1988). Innovation in Large and Small
Firms: An Empirical Analysis. American Economic Review
78(4):678–690.
Acs, Z.J. and Audretsch, D.B. (1990). Innovation and Small Firms.
Cambridge, MA: MIT Press.
Acs, Z.J. and Gifford, S. (1996). Innovation of Entrepreneurial Firms.
Small Business Economics 8(3):203–218.
Adams, W. and Brock, J. (1986). The Bigness Complex. New York:
Pantheon Books.
Ahuja, G. and Lampert, C.M. (2001). Entrepreneurship in the Large
Corporation: A Longitudinal Examination of How Established
Firms Create Breakthrough Innovations. Strategic Management
Journal 22(6–7):521–543.
Ahuja, G. and Katila, R. (2001). Technological Acquisition and the
Innovative Performance of Acquiring Firms: A Longitudinal
Study. Strategic Management Journal 22(3):197–220.
Anton, J. and Yao, D. (2004). Little Patents and Big Secrets: Managing
Intellectual Property. Rand Journal of Economics 35(1):1–22.
Arora, A., Ceccagnoli, M., and Cohen, W.M. (2003). R&D and the
Patent Premium. National Bureau of Economic Research Working
Paper Paper No. 9431.
Audretsch, D.B. and Acs, Z. (1991). Innovation and Size at the Firm
Level. Southern Economic Journal 57(3):739–745.
Barczak, G. (1995). New Product Strategy, Structure, Process, and
Performance in the Telecommunications Industry. Journal of Prod-
uct Innovation Management 12(3):224–234.
Bettis, R.A. and Hitt, M.A. (1995). The New Competitive Landscape.
Strategic Management Journal 16:7–19 (Special Summer Issue).
Bogner, W.C. and Bansal, P. (2007). Knowledge Management as the
Basis of Sustained High Performance. Journal of Management
Studies 44(7):165–188.
Bound, J., Cummins, C., Griliches, Z., Hall, B.H., and Jaffe, A. (1984).
Who Does R&D and Who Patents? In: Patents and Productivity,
ed. Z. Griliches. Chicago: University of Chicago Press, 21–54.
Calantone, R., Garcia, R., and Droge, C. (2003). The Effects of En-
vironmental Turbulence on New Product Development Strategy
Planning. Journal of Product Innovation Management 20(2):90–103.
Cardinal, L.B. and Hatfield, D.E. (2000). Internal Knowledge Gener-
ation: The Research Laboratory and Innovative Productivity in the
Pharmaceutical Industry. Journal of Engineering & Technology
Management 17(3–4):247–271.
Chiesa, V. (1996). Managing the Internationalization of R&D activi-
ties. IEEE Transactions on Engineering Management 43(1):7–23.
Cho, H.-J. and Pucik, V. (2005). Relationship Between Innovativeness,
Quality, Growth, Profitability, and Market Value. Strategic Man-
agement Journal 26(6):555–575.
Cohen, W.M. and Klepper, S. (1996). Firm Size and the Nature of
Innovation within Industries: The Case of Process and Product
R&D. Review of Economics and Statistics 78(2):232–243.
Cohen, W.M., Nelson, R.R., and Walsh, J.P. (2000). Protecting Their
Intellectual Assets: Appropriability Conditions and Why U.S.
Firms Patent (or Not). National Bureau of Economic Research
Working Paper No. 7552.
Comanor, W.S. and Scherer, F.M. (1969). Patent Statistics as a Measure
of Technical Change. Journal of Political Economy 77(3):392–397.
DeCarolis, D.M. and Deeds, D.L. (1999). The Impact of Stocks and
Flows of Organizational Knowledge on Firm Performance: An
Empirical Investigation of the Biotechnology Industry. Strategic
Management Journal 20(10):953–968.
Encaoua, D., Guellec, D., and Martinez, C. (2006). Patent Systems for
Encouraging Innovation: Lessons from Economic Analysis. Re-
search Policy 35(9):1423–1440.
Ernst, H. (2001). Patent Applications and Subsequent Changes of Per-
formance: Evidence from Time-Series Cross-Section Analyses on
the Firm Level. Research Policy 30(1):143–157.
K. W. ARTZ ET AL.
Fleming, L. (2002). Finding the Organizational Sources of Technolog-
ical Breakthroughs: The Story of Hewlett-Packard’s Thermal Ink-
Jet. Industrial & Corporate Change 11(5):1059–1084.
Geroski, P., Machin, S., and Van Reenan, J. (1993). The Profitability
of Innovating Firms. Rand Journal of Economics 24(2):198–211.
Grant, R.M. (2008). Contemporary Strategy Analysis, (6th ed.). Ox-
ford: Blackwell.
Graves, S.B. and Langowitz, N.S. (1993). Innovative Productivity and
Returns to Scale in the Pharmaceutical Industry. Strategic Man-
agement Journal 14(8):593–605.
Greenhalgh, C. and Longland, M. (2005). Running to Stand Still?—
The Value of R&D, Patents and Trade Marks in Innovating Man-
ufacturing Firms. International Journal of the Economics of Business
12(3):307–328.
Griliches, Z. (1986). Productivity, R&D, and Basic Research at the
Firm Level in the 1970s. American Economic Review 76(1):141–154.
Griliches, Z., Hall, B., and Pakes, A. (1991). R&D, Patents, and Mar-
ket Value Revisited: Is There A Second (Technological Opportu-
nity) Factor? Journal of Economics of Innovation and New
Technology 1:183–201.
Hagedoorn, J. and Cloodt, M. (2003). Measuring Innovative Perfor-
mance: Is There an Advantage in Using Multiple Indicators? Re-
search Policy 32(8):1365–1379.
Hagedoorn, J. and Duysters, G. (2002). The Effect of Mergers and
Acquisitions on the Technological Performance of Companies in a
High-Tech Environment. Technology Analysis and Strategic Man-
agement 14(1):67–85.
Hall, B.H. and Ham, R. (1999). The Patent Paradox Revisited:
Determinants of Patenting in the U.S. Semiconductor Industry,
1980–94. National Bureau of Economic Research Working Paper
No. 7062.
Hall, B.H., Jaffe, A.B., and Trajtenberg, M. (2001). The NBER
Patent Citation Data File: Lessons, Insights and Methodological
Tools. National Bureau of Economic Research Working Paper
8498.
Hall, B.H. and Ziedonis, R.H. (2001). The Patent Paradox Revisited:
An Empirical Study of Patenting in the U.S. Semiconductor In-
dustry, 1979–1995. RAND Journal of Economics 32(1):101–128.
Hall, B.J., Griliches, Z., and Hausman, J.A. (1986). Patents and R
and D: Is There a Lag? International Economic Review 27(2):265–
283.
Helfat, C. and Peteraf, M.A. (2003). The Dynamic Resources-Based
View: Capabilities Lifecycle. Strategic Management Journal 24(10):
997–1012.
Heller, M.A. and Eisenberg, R.S. (1998). Can Patents Deter Innovation?
The Anticommons in Biomedical Research. Science 280:688–701.
Hill, C.W.L. and Hansen, G.S. (1991). A Longitudinal Study of the
Causes and Consequences of Changes in Diversification in the U.S.
Pharmaceutical Industry 1977–1986. Strategic Management Journal
12(3):187–199.
Hitt, M.A., Hoskisson, R.E., and Nixon, R.D. (1993). A Mid-Range
Theory of Interfunctional Integration: Its Antecedents and
Outcomes. Journal of Engineering and Technology Management
10(1–2):161–185.
Hitt, M.A., Hoskisson, R.E., Johnson, R.A., and Moesel, D.A. (1996).
The Market for Corporate Control and Firm Innovation. Strategic
Management Journal 39(5):1084–1119.
Hoopes, D.G. and Postrel, S. (1999). Share Knowledge, ‘‘Gliches’’ and
Product Development Performance. Strategic Management Journal
20(9):837–865.
Hua, S.Y. and Wemmerlov, U. (2006). Product Change Intensity,
Product Advantage, and Market Performance: An Empirical In-
vestigation of the PC Industry. Journal of Product Innovation Man-
agement 23(4):316–329.
Jensen, E.J. (1987). Research Expenditures and the Discovery of New
Drugs. Journal of Industrial Economics 36(1):83–95.
A LONGITUDINAL STUDY OF THE IMPACT OF R&D, PATENTS, AND PRODUCT INNOVATION
Klette, T.J. (1996). R&D, Scope Economies and Plant Performance.
Rand Journal of Economics 27(3):502–522.
Kretschmer, M. and Soetendorp, R. (2001). The Strategic Use of Busi-
ness Method Patents: A Pilot Study of Out of Court Settlements.
Journal of e-Business 2(1):9–38.
Lager, T. (2002). Product and Process Development Intensity in Pro-
cess Industry: A Conceptual and Empirical Analysis of the Allo-
cation of Company Resources for the Development of Process
Technology. International Journal of Innovation Management
6(2):105–130.
Langowitz, N.S. and Graves, S.B. (1992). Innovative Productivity in Phar-
maceutical Firms. Research Technology Management 35(2):39–52.
Lee, H., Smith, K.G., Grimm, C.M., and Schomburg, A. (2000). Tim-
ing, Order and Durability of New Product Advantages with Imi-
tation. Strategic Management Journal 21(1):23–30.
Levin, R.C., Klevorick, A.K., Nelson, R.R., and Winter, S.G. (1987).
Appropriating the Returns from Industrial Research and Develop-
ment. Brookings Papers on Economic Activity 3:783–820.
Li, H. and Atuahene-Gima, K. (2001). Product Innovation Strategy
and the Performance of New Technology Ventures in China. Acad-
emy of Management Journal 44(6):1123–1134.
Lieberman, M.B. and Montgomery, D.B. (1988). First-Mover Advan-
tages. Strategic Management Journal 9:41–58 (Summer Special
Issue).
MacDonald, S. (2004). When Means Become Ends: Considering the
Impact of Patent Strategy on Innovation. Information Economics
and Policy 16(1):135–158.
Mann, R.J. and Sager, T. (2007). Patents, Venture Capital and Soft-
ware Start-ups. Research Policy 36(2):193–208.
Mansfield, E. (1962). Entry, Gibrat’s Law, Innovation, and the Growth
of Firms. American Economic Review 55(5):1023–1051.
Mansfield, E. (1980). Basic Research and Productivity Increase in
Manufacturing. American Economic Review 70(5):863–873.
Mansfield, E. (1986). Patents and Innovation: An Empirical Study.
Management Science 32(2):173–181.
Marsh, S.J. and Stock, G.N. (2003). Building Dynamic Capabilities
in New Product Development through Intertemporal Inte-
gration. Journal of Product Innovation Management 20(2):
136–148.
Masayuki, K. (1999). R&D Dynamics of Creating Patents in the Jap-
anese Industry. Research Policy 28(6):587–600.
Mazzoleni, R. and Nelson, R.R. (1998). Economic Theories about the
Benefits and Costs of Patents. Journal of Economic Issues
32(4):1031–1052.
McMillan, C.S., Mauri, A., and Hamilton, R.D. III (2003). The Impact
of Publishing and Patenting Activities on New Product Develop-
ment and Firm Performance: The Case of the US Pharmaceutical
Industry. International Journal of Innovation Management 7(2):
213–221.
Montgomery, C. (1995). Of Diamonds and Rust: A New Look at Re-
sources. In: Resource-Based and Evolutionary Theories of the Firm:
Towards a Synthesis, ed. C. Montgomery. Norwell, MA: Kluwer
Academic Publishers, 251–268.
Murphy, G.B., Trailer, J.W., and Hill, R.C. (1996). Measuring Per-
formance in Entrepreneurship Research. Journal of Business Ven-
turing 36(1):15–23.
Nerkar, A. and Roberts, P.W. (2004). Technological and Product-
Market Experience and the Success of New Product Introductions
in the Pharmaceutical Industry. Strategic Management Journal
25(8–9):779–799.
Pakes, A. (1985). On Patents, R&D, and the Stock Market Rate of
Return. Journal of Political Economy 93(2):390–409.
Pakes, A. and Griliches, Z. (1984). Patents and R&D at the Firm Level:
A First Look. In: Patents and Productivity, ed. Z. Griliches. Chi-
cago: University of Chicago Press, 55–72.
J PROD INNOV MANAG 739
2010;27:725–740
Peeters, C. and van Pottelsberghe de la Potterie, B. (2006). Innovation
Strategy and the Patenting Behavior of Firms. Journal of Evolu-
tionary Economics 16(1–2):109–135.
Penner-Hahn, J. and Shaver, J.M. (2005). Does International
Research and Development Increase Patent Output? An Analysis
of Japanese Pharmaceutical Firms. Strategic Management Journal
26(2):121–140.
Peterson, K.J., Handfield, R.B., and Ragatz, G.L. (2005). Supplier In-
tegration into New Product Development: Coordinating Product,
Process and Supply Chain Design. Journal of Operations Manage-
ment 23(3–4):371–388.
Prajogo, D.I. (2006). The Relationship between Innovation and Business
Performance—A Comparative Study between Manufacturing and
Service Firms. Knowledge and Process Management 13(3):218–225.
Price, R.M. (1996). Technology and Strategic Advantage. California
Management Review 38(3):38–56.
Rai, A.K. (2001). Fostering Cumulative Innovation in the Biophar-
maceutical Industry: The Role of Patents and Antitrust. Berkeley
Technology Law Journal 16(2):813–854.
Rivette, K. and Kline, D. (2000). Discovering New Value in Intellec-
tual Property. Harvard Business Review 78(1):54–66.
Roberts, P.W. (1999). Product Innovation, Product-Market Competi-
tion and Persistent Profitability in the U.S. Pharmaceutical Indus-
try. Strategic Management Journal 20(7):655–670.
Roberts, P.W. and Amit, R. (2003). The Dynamics of Innovative
Activity and Competitive Advantage: The Case of Australian
Retail Banking, 1981–1995. Organization Science 14(2):107–122.
Rosenberg, N. (1990). Why Do Firms Do Basic Research (with Their
Own Money)? Research Policy 19(2):165–174.
Rosenkopf, L. and Nerkar, A. (2001). Beyond Local Search: Bound-
ary-Spanning, Exploration, and Impact in the Optical Disk Indus-
try. Strategic Management Journal 22(4):287–306.
Salavou, H. (2002). Profitability in Market-Oriented SMEs: Does
Product Innovation Matter? European Journal of Innovation Man-
agement 5(3):164–171.
Schankerman, M. and Pakes, A. (1986). Estimates of the Value of
Patent Rights in European Countries during the Post-1950 Period.
Economic Journal 96(384):1052–1076.
Scherer, F.M. and Ross, D. (1990). Industrial Market Structure and
Economic Performance. Boston: Houghton Mifflin.
Schumpeter, J.A. (1934). The Theory of Economic Development. Cam-
bridge, MA: Harvard University Press.
Schumpeter, J.A. (1950). Capitalism, Socialism and Democracy. New
York: Harper.
Scott, G.M. (2000). Critical Technology Management Issues of New
Product Development in High-Tech Companies. Journal of Product
Innovation Management 17(1):57–77.
Sher, P.J. and Yang, P.Y. (2005). The Effects of Innovative
Capabilities and R&D Clustering on Firm Performance: The Ev-
idence of Taiwan’s Semiconductor Industry. Technovation
25(1):33–43.
Stuart, T.E. (2000). Interorganizational Alliances and the Performance
of Firms: A Study of Growth and Innovation Rates in a High-
Technology Industry. Strategic Management Journal 21(8):791–
811.
Teece, D.J. (1996). Capturing Value from Technological Innova-
tion: Integration, Strategic Partnering, and Licensing
Decisions. In: Managing Strategic Innovation and Change, ed.
M.L. Tushman, and P. Anderson. New York: Oxford University
Press, 287–306.
Trajtenberg, M. (1990). A Penny for Your Quotes: Patent Citations
and the Value of Information. RAND Journal of Economics
21(1):325–342.
Tsai, K.-H. (2005). R&D Productivity and Firm Size: A Nonlinear
Examination. Technovation 25(7):795–803.
740 J PROD INNOV MANAG
2010;27:725–740
Venkatraman, N. and Ramanujam, V. (1986). Measurement of
Business Performance in Strategy Research: A Comparison of Ap-
proaches. Academy of Management Review 11(4):801–814.
Voss, C.S. (1994). Significant Issues for the Future of Product Inno-
vation. Journal of Product Innovation Management 11(5):460–463.
Wheelwright, S.C. and Clark, K.B. (1995). Leading Product Develop-
ment. New York: Free Press.
K. W. ARTZ ET AL.
Zahra, S.A. (1993). New Product Introduction in Established Compa-
nies: Associations with Industry and Strategy Variables. Entrepre-
neurship Theory and Practice 18(2):47–70.
Ziedonis, R.H. (2004). Don’t Fence Me In: Fragmented Markets for
Technology and the Patent Acquisition Strategies of Firms. Man-
agement Science 50(6):804–820.