Industrial innovation and firm performance: A re-conceptualization and exploratory structural equation analysis

Successful new products are essential to the financial viability of many firms, with more than half of most firms' sales resulting from products introduced in the past decade. But despite much research attempting to relate industrial innovation and firm performance, a cohesive theory has yet to emerge. We use structural equation models to assess the simultaneous impact of market structure, firm size and diversification on industrial innovation and firm performance. We measure innovative output by both the number and the nature of resulting new products. In a sample of forty firms in the industrial chemicals industry, we found that (a) innovativeness results in better firm performance; (b) intermediate levels of market concentration result in more innovativeness and better performance than more extreme levels; (c) smaller firms are more innovative and perform better than larger firms, and (d) less diversified firms perform better than highly diversified firms.