Wing Wah Tham, Salomé Baslandze, Elvira Sojli, and Leo Liu
Working Paper 2025-1
February 2025
Full text
Abstract:
This paper studies the interaction between process and product innovations and their distinct role in firm growth dynamics. We differentiate empirically and theoretically two types of process innovations: foundational processes that advance production technology and cost-reducing processes that enhance existing production efficiency. We develop an innovation model of product varieties with quality heterogeneity to illustrate how these innovations affect firm growth differently and highlight how process innovation induces product innovation. By analyzing millions of patent texts from 1900 to 2020, we classify innovations into product, cost-reducing process, and foundational process innovations. We find that foundational processes lead to sustained firm growth, especially through their effect on subsequent product creation. R&D-intensive firms focused on "deep-tech" innovations have an advantage in creating foundational processes, resulting in superior product quality. Using patents linked to FDA-approved drugs, we show that firms with a comparative advantage in creating foundational processes, due to greater knowledge and technological stock, tend to produce higher-value products.
JEL classification: O3, O4
Key words: foundational process innovation, process innovation, product innovation, process-driven products, firm growth, technological possibility frontier
https://doi.org/10.29338/wp2025-01
This paper supersedes the previously circulated paper "Advanced Manufacturing, Product Innovations, Productivity and Growth
." The authors are very grateful to Dimitris Papanikolaou and an anonymous referee for extremely insightful comments that have been instrumental to the development of the current draft. They also thank Jan Bena, Laurent Cavenaile (discussant), Thierry Foucault, Murray Frank, Johan Hombert, Po-Hsuan Hsu (discussant), Felipe Saffie, Gordon Phillips, Justin Pierce (discussant), Elena Simintzi, Scott Stern, John Walsh, Alminas Zaldokas, and participants at the AEA, ABFER, the AIEA-NBER Conference, the CEPR Rising Asia Workshop, Virtual Corporate Finance seminar, the FIRN Corporate Finance meeting, the Taiwan Symposium on Innovation Economics and Entrepreneurship, AFBC, FMA Asia, EARIE, SETA, Macro Research Group Workshop, the University of Sydney Business Financing and Banking Research Group Annual Workshop, Emory University, HEC Paris, Monash University, Swinburne University of Technology, University of Technology Sydney, Macquarie University, University of Sydney, and UNSW for very helpful comments. They thank Angela Chen for excellent research assistance. They are very indebted to Michael I Montembeau, Suja C, Ganesh Venkatraman, and their team at Maxval Group Inc., as well as Catriona Bruce and Tom Millist and their team at IP Australia, for their input with the patent classification measures. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or its staff.
Author order has been randomly drawn. Please address questions regarding content to Elvira Solji (corresponding author), University of New South Wales Sydney; Salomé Baslandze, Federal Reserve Bank of Atlanta; Leo Liu, University of Technology Sydney; or Wing Wah Tham, University of New South Wales Sydney.
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