Failure, innovation, and productivity growth: Evidence from a structural model

Abstract

ABSTRACT This study employs a simultaneous equation model to examine the extent to which firms’ innovation failure can affect future innovation and productivity growth. Our findings suggest that experiencing past failure in the innovation process enhances the innovation performance of a firm; this, in turn, contributes to productivity growth. The primary contribution of this study is the proposal of a conceptual model for the innovation process that considers failure experience as a major input to the knowledge production function. Our results also offer several implications for innovation managers and policymakers. For example, innovation policy initiatives should consider not only the tangible accomplishments of firms, but also their failure experiences. This study also highlights a method to enhance innovation by establishing systems that encourage challenging research and recognise and reward the process, even when a project fails.