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

Author(s): Lisandra Flach, Michael Irlacher
Publication Date: March 2017
Keyword(s): Cannibalization Effect, innovation, Market Size Effect, multi-product firms, product differentiation, Spillovers
JEL(s): F12, F14, L25
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11922

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.