Measuring the Degree of Corporate Innovation

Abstract

Corporate innovation propels both company performance and economic growth. Yet, measuring corporate innovation proves to be challenging, leading researchers to rely on a variety of different signals, such as reported R&D expenditures, patent citations and new product announcements. I posit that each of these signs of corporate innovation provides a noisy, biased signal of a firm’s technological progress and capacity. Moreover, relying on a single indicator of an activity eliminates useful information, suggesting that all of the observable signals about corporate innovation should be included in measuring it. Using the annual survey of senior executives by BCG/BusinessWeek to identify the most innovate companies, I create two composite measures of corporate innovation. Finally, I evaluate how a common use of these individual, noisy signals of innovation to capture R&D productivity (patents scaled by R&D) influences studies on innovative efficiency. Simulation analysis shows that scaling one noisy, biased signal of innovation by another (e.g., R&D productivity) magnifies the noisy signal problem and leads to biased inferences. Arguably, the composite measures, based on multiple signals of corporate innovation, provide more reliable assessments of corporate innovation than any single indicator. Finally, I discuss the use of composite measures of innovation in empirical research on technological innovation and the implications for policy makers.