Innovation and firm performance

Abstract

In this paper, the current state of knowledge regarding the relation between innovation and firm performance is reviewed. The relationship is empirically tested. There is a special focus on small and medium-sized firms. In the literature, there is a trend towards a system approach. Empirical studies using this approach distinguish four parts in the innovation-performance relationship. First of all, a company decides whether or not to innovate. Secondly, if a company decides to innovate, what is the level of input in innovation. The innovative input will be transformed into innovative output. And finally, the innovative output will result in a better firm performance. In the model several feedback loops are incorporated, for instance, from firm performance to innovative input.