Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Do Innovations Ever Pay Off? the Value to Investing in Innovation

23.06.2008
Gerard J. Tellis, a professor of marketing at the University of Southern California’s Marshall School of Business, and Ashish Sood, an assistant professor at the of marketing at Emory University’s Goizueta Business School have devised a new metric for evaluating the total stock market returns to an innovation project.

Management has often been criticized for an earnings-focused short term orientation that reduces or delays investments in risky, long term innovation projects in order to boost the firm’s stock price. Rarely does a discussion of corporate strategy or entrepreneurial motivation proceed these days without alluding to one significant dynamic—innovation.

For example, Clayton Christensen and Scott Anthony write in Business Week, ”The notion that managers must above all appease investors drives behavior that focuses exclusively on quarterly results. Thus, many management teams hesitate to invest in promising innovations that are likely to hurt near-term financial performance.” But do investments in innovations hurt stock prices?

Not so suggests Gerard J. Tellis, a professor of marketing at the University of Southern California’s Marshall School of Business, and Ashish Sood, an assistant professor at the of marketing at Emory University’s Goizueta Business School. They have devised a new metric for evaluating the total stock market returns to an innovation project. “We’re assessing whether markets respond negatively to investments in innovation and whether they enforce a shorter orientation,” explains Tellis.

“The key questions are: how does the stock market react to announcements about innovation and what is the total return to the innovation project?” They answer these questions in their paper, “Do Innovations Really Payoff? Total Returns to Innovation,” which is forthcoming in Marketing Science, the top journal in the marketing field.

Tellis and Sood, who have teamed up before to research areas such as technological evolution and new products adoption across global markets, set out again with this research to help managers better understand and quantify the investments they are making in innovation. In this case, they want them to recognize the power of innovation to do everything from fueling the growth of new products to promoting the global competitiveness of nations. “Firms may underinvest in innovation because of the high costs, the long delay in reaping market returns if any, the uncertainty of those returns, and the difficulty of adequately measuring them,” suggests Tellis. “Indeed, accurately assessing the market returns to innovation may be critical to motivating firms to invest in innovation.”

The authors argue that the best approach is for firms to examine the market returns to an entire innovation project. They demonstrate this by using the so-called event study method, also known as the Fama-French-Momentum 4 Factor Model, to analyze 5,481 announcements—everything from the start of a project to joint ventures and key approvals—from 69 firms in five markets and 19 technologies during the period from 1977 to 2006. The event study method, popular for the last 30 years, captures the stock market’s reaction to an announcement and actually predicts the valuation that the stock market puts on that particular announcement.

The authors analyze all announcements related to a project and the returns to each announcement. This all-inclusive approach sets their research apart from existing studies. “A big limitation of prior research is that they were looking at one event,” notes Sood. ” It’s necessary to look at the entire project and all the announcements that the firm makes. That gives us a better estimate of the returns to the investments.” As a means of organizing the announcements, Sood and Tellis separate them into three groups: the activities related to the setup of the innovation project; the activities related to the development of the product; and the market activities related to the commercialization of the product.

The authors find that total market returns to an innovation project are $643 million, more than 13 times the $49 million due to an average innovation event.

Returns to overall projects are substantially more than returns to individual events. “Focus on only one or two types of events or announcements will lead to underestimation of total returns,” notes Sood. “Any conclusion based on that lower, wrong estimate might actually make the manager decide that innovation is no good or the markets are not receptive.”

The research also reveals that, of the three sets of innovation activities, returns to the development activities are consistently the highest across and within categories. “The big surprise was that the markets actually react more to the development phase than the commercialization phase, which shows that the stock market is not so short-term in its outlook,” says Sood. “Because the stock markets reward firms for making announcements in the development phase, it is in the firms’ interest to be open to the market and to update progress on an innovation project.”

It’s important to note, adds Tellis, that quality, not quantity, defines market reactions to announcements. A firm that decides to simply increase the number of project-related announcements it makes to inspire market reaction will not necessarily yield a greater return on investment. Says Tellis: “A mere increase in the number of announcements will not improve your returns.”

Sood and Tellis already have continued down their path of innovation research. They are using existing data to develop a statistical model that will help firms look at the returns in the initial phases of an innovation project and predict how the stock market will react in future phases. After all, the market returns to innovation are among the best assessments of the true rewards of innovation.

About the USC Marshall School of Business
Based at the crossroads of the Pacific Rim, in Los Angeles at the University of Southern California, the USC Marshall School of Business is dedicated to training global leaders to make a difference. USC Marshall is the best place to learn the art and science of business.

The school’s complete array of programs annually serve more than 5,000 undergraduate, graduate, professional and executive-education students, who attend classes at the main University Park campus in Los Angeles, and in satellite facilities in Irvine and North San Diego County.

In conjunction with Jiao Tong University in Shanghai, USC Marshall also operates a Global Executive MBA program in China.

LeRoy Hudson | newswise
Further information:
http://www.marshall.usc.edu

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Making lightweight construction suitable for series production

More and more automobile companies are focusing on body parts made of carbon fiber reinforced plastics (CFRP). However, manufacturing and repair costs must be further reduced in order to make CFRP more economical in use. Together with the Volkswagen AG and five other partners in the project HolQueSt 3D, the Laser Zentrum Hannover e.V. (LZH) has developed laser processes for the automatic trimming, drilling and repair of three-dimensional components.

Automated manufacturing processes are the basis for ultimately establishing the series production of CFRP components. In the project HolQueSt 3D, the LZH has...

Im Focus: Wonder material? Novel nanotube structure strengthens thin films for flexible electronics

Reflecting the structure of composites found in nature and the ancient world, researchers at the University of Illinois at Urbana-Champaign have synthesized thin carbon nanotube (CNT) textiles that exhibit both high electrical conductivity and a level of toughness that is about fifty times higher than copper films, currently used in electronics.

"The structural robustness of thin metal films has significant importance for the reliable operation of smart skin and flexible electronics including...

Im Focus: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Fighting drug resistant tuberculosis – InfectoGnostics meets MYCO-NET² partners in Peru

28.04.2017 | Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

 
Latest News

How Plants Form Their Sugar Transport Routes

28.04.2017 | Life Sciences

Protein 'spy' gains new abilities

28.04.2017 | Life Sciences

Researchers unravel the social network of immune cells

28.04.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>