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 Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

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: First-of-its-kind chemical oscillator offers new level of molecular control

DNA molecules that follow specific instructions could offer more precise molecular control of synthetic chemical systems, a discovery that opens the door for engineers to create molecular machines with new and complex behaviors.

Researchers have created chemical amplifiers and a chemical oscillator using a systematic method that has the potential to embed sophisticated circuit...

Im Focus: Long-lived storage of a photonic qubit for worldwide teleportation

MPQ scientists achieve long storage times for photonic quantum bits which break the lower bound for direct teleportation in a global quantum network.

Concerning the development of quantum memories for the realization of global quantum networks, scientists of the Quantum Dynamics Division led by Professor...

Im Focus: Electromagnetic water cloak eliminates drag and wake

Detailed calculations show water cloaks are feasible with today's technology

Researchers have developed a water cloaking concept based on electromagnetic forces that could eliminate an object's wake, greatly reducing its drag while...

Im Focus: Scientists channel graphene to understand filtration and ion transport into cells

Tiny pores at a cell's entryway act as miniature bouncers, letting in some electrically charged atoms--ions--but blocking others. Operating as exquisitely sensitive filters, these "ion channels" play a critical role in biological functions such as muscle contraction and the firing of brain cells.

To rapidly transport the right ions through the cell membrane, the tiny channels rely on a complex interplay between the ions and surrounding molecules,...

Im Focus: Towards data storage at the single molecule level

The miniaturization of the current technology of storage media is hindered by fundamental limits of quantum mechanics. A new approach consists in using so-called spin-crossover molecules as the smallest possible storage unit. Similar to normal hard drives, these special molecules can save information via their magnetic state. A research team from Kiel University has now managed to successfully place a new class of spin-crossover molecules onto a surface and to improve the molecule’s storage capacity. The storage density of conventional hard drives could therefore theoretically be increased by more than one hundred fold. The study has been published in the scientific journal Nano Letters.

Over the past few years, the building blocks of storage media have gotten ever smaller. But further miniaturization of the current technology is hindered by...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

See, understand and experience the work of the future

11.12.2017 | Event News

Innovative strategies to tackle parasitic worms

08.12.2017 | Event News

AKL’18: The opportunities and challenges of digitalization in the laser industry

07.12.2017 | Event News

 
Latest News

Engineers program tiny robots to move, think like insects

15.12.2017 | Power and Electrical Engineering

One in 5 materials chemistry papers may be wrong, study suggests

15.12.2017 | Materials Sciences

New antbird species discovered in Peru by LSU ornithologists

15.12.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>