Nav: Home

Business investment in innovation pays off

October 02, 2016

Firms need to invest in innovation in order to create new technologies and move the economy forward, according to new research from the University of Houston.

Those that do invest in building their innovative capacity are rewarded over the long run by higher stock market returns and profits, said Praveen Kumar, professor and chairman of the Department of Finance at the UH C.T. Bauer College of Business.

Kumar and Dongmei Li of the University of South Carolina analyzed the long run financial market and profitability implications of investments by companies for a study published in the October issue of the Journal of Finance.

"Firms in innovation-driven industries proactively use capital investment to facilitate generation of new growth options by building (innovative capacity)," the researchers wrote. "Moreover, (innovative capacity) investment increases expected revenues by allowing the firm to generate higher quality-based sales from innovations, conditional on their being generated and exercised."

Kumar noted that scientific breakthroughs generally benefit the economy only when they are developed into products and technologies.

"Commercializing and developing these breakthroughs require large investments by innovative firms," he said. "Analyzing the long run financial rewards of investments in innovation are crucial to understanding the prospective economic impact of STEM initiatives."

The study argues that by looking at traditional and investments in innovative capacity - things like building and equipping long-term research facilities and acquiring patents - separately, firms can identify a difference in stock market and profitability response, which is not apparent when the two are grouped together.

Previous research has found that the stock of companies with high rates of capital investment generally tend to "underperform" immediately following the investment, Kumar said. But that research hasn't distinguished between investment in innovative capacity and traditional capital investment to determine if stock market response differs between the two.

"If innovative and traditional investment companies are pooled together, we tend to observe that stock markets punish higher investments, at least in the short run," he said.

By separating the investments, large research and development firms, with greater financial resources to ultimately develop innovations, are rewarded over time by the stock market, generating higher profits, leading to shareholders gaining more in the longer run.

"This is important information for managers of these companies since it encourages them to invest in an innovative capacity, which would lead to development of new products and technologies, which is helpful for the entire economy," Kumar added.
-end-


University of Houston

Related Innovation Articles:

Shaping the future of health innovation
Future advances in healthcare will be aided by a new £10 million facility -- the National Institute for Health Research Innovation Observatory based at Newcastle University, UK.
Building on the foundations of innovation
The new issue of Technology and Innovation has a special section on the 2016 NAI Conference, including articles on gender and bias in science, the history of the National Academy of Inventors, alternative rubber crops, and the next industrial revolution.
What is innovation, and how can we awaken its dormant traits and cultivate them?
While education may not be able to create innovative traits in individuals, education may improve the ability of individuals to utilize the traits they already possess.
LA BioMed's 4th Annual Innovation Showcase
The Innovation Showcase will be attended by over 300 entrepreneurs, investors, executives from biotech and pharma medical devices companies, legal experts, service providers, prominent scientists, and technology transfer personnel from premier academic institutions.
Accelerating low-carbon innovation through policy
Will innovative technologies contribute to mitigating climate change? Learn about the successes and failures of low-carbon technology and how policy instruments help and hinder technological innovation.
More Innovation News and Innovation Current Events

Best Science Podcasts 2019

We have hand picked the best science podcasts for 2019. Sit back and enjoy new science podcasts updated daily from your favorite science news services and scientists.
Now Playing: TED Radio Hour

Teaching For Better Humans
More than test scores or good grades — what do kids need to prepare them for the future? This hour, guest host Manoush Zomorodi and TED speakers explore how to help children grow into better humans, in and out of the classroom. Guests include educators Olympia Della Flora and Liz Kleinrock, psychologist Thomas Curran, and writer Jacqueline Woodson.
Now Playing: Science for the People

#535 Superior
Apologies for the delay getting this week's episode out! A technical glitch slowed us down, but all is once again well. This week, we look at the often troubling intertwining of science and race: its long history, its ability to persist even during periods of disrepute, and the current forms it takes as it resurfaces, leveraging the internet and nationalism to buoy itself. We speak with Angela Saini, independent journalist and author of the new book "Superior: The Return of Race Science", about where race science went and how it's coming back.