Discussion paper

DP11922 Product versus Process: Innovation Strategies of Multi-Product Firms

We investigate the effects of better access to foreign markets on innovation
strategies of multi-product firms in industries with different scope for
product differentiation. Industry-specific demand and cost linkages induce a
distinction between the returns to innovation. In differentiated industries,
cannibalization is lower and firms invest more in product innovation. In
homogeneous industries, firms internalize intra-firm spillovers and invest
more in process innovation. Using firm-level data and large exchange rate
devaluations, we show that better access to foreign markets increases the
incentive to innovate. However, we exploit differential effects across
industries and show that the innovation strategies depend on the scope of differentiation.

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Citation

Flach, L (2017), ‘DP11922 Product versus Process: Innovation Strategies of Multi-Product Firms‘, CEPR Discussion Paper No. 11922. CEPR Press, Paris & London. https://cepr.org/publications/dp11922