Abstract
This paper examines the impact of innovation on the performance of US business service firms. We distinguish between different levels of innovation (new-to-market and new-to-firm) in our analysis, and allow explicitly for sample selection issues. Reflecting the literature, which highlights the importance of external interaction in service innovation, we pay particular attention to the role of external innovation linkages and their effect on business performance. We find that the presence of service innovation and its extent has a consistently positive effect on growth, but no effect on productivity. There is evidence that the growth effect of innovation can be attributed, at least in part, to the external linkages maintained by innovators in the process of innovation. External linkages have an overwhelmingly positive effect on (innovator) firm performance, regardless of whether innovation is measured as a discrete or continuous variable, and regardless of the level of innovation considered.
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