Innovation and Profits; A Virtuous Circle

Using a panel of 1130 companies with financial data over a three-year period, this paper confirms that contemporaneous relationships exist between innovation performance and profits. However, it's difficult to tell whether companies deliver profits because they are innovative, or whether making profits enable companies to be more innovative. Using innovation performance and profits as independent variables, and a proxy for economic performance as dependent variable, this paper establishes that economic performance is positively correlated to both innovation performance and profits, and that this correlation is statistically significant at the 99% level.