Product innovation, cost-cutting and firm economic performance in the post-crisis context: Canadian micro evidence

Zhan Su,Jianmin Tang

doi:10.1108/jcc-08-2016-0009

Abstract

PurposeIt has been suggested that to be successful in the current global economy with increased competition and ever changing markets, especially in the post-crisis context, firms need to focus more on innovation in exploring new ideas and designing new products to develop new markets than on cost-cutting strategies to maintain cost leadership in old markets. However, because of the lack of micro data, this conjecture has not been systematically evaluated. This paper aims to fill this important void by studying the economic performance associated with these two different business strategies using Canadian micro data.Design/methodology/approachThe main data for our analysis are from the Survey of Innovation and Business Strategy (2009 and 2012) which is a sample-based survey of Canadian government. The authors used in this research regression models for the econometric analysis of the underlying factors for undertaking certain business strategies and how business strategies link to economic performance. They also used propensity score matching to ensure the group of firms with innovation strategy being comparable to that with cost-cutting.FindingsThe research shows that firms focusing on product innovation are indeed more productive than firms focusing on cost-cutting, although there is no evidence that these two different strategies make a difference in profitability. The first indication from the research has been that certain characteristics of Canadian firms are very useful predictors for firms to undertake product innovation. They are, among other things, the age of the firms, the single-establishment structure of the business and being multinationals.Research limitations/implicationsThis empirical research opens up many interesting avenues for future research. Some other variables could be integrated into the models to increase the rate of explained variance. Moreover, because this research is based only on the case of Canadian firms and for a relatively short period of four years after the 2008 crisis, an extension to other context and to a longer period of time should be interesting.Practical implicationsThe research has confirmed that Canadian firms adopting long-term business strategies based on product innovation are more productive.Social implicationsThe results truly concur with the vision of the Government of Canada, like some other developed countries, on the importance of innovation and its policies in encouraging business innovation in driving the growth of the Canadian economy and improving the standard of living of country.Originality/valueMainly because of the lack of micro data, the existing researches have not provided solid evidence on why firms are choosing different business strategies when they are operating in the same business conditions and how the financial crisis has affected the undertaking of business strategies. They have not established a clear linkage between economic performance and different business strategies, although there has been some anecdotal evidence about their association. This study aims to bridge the knowledge gaps with theoretical and practical contributions.

Highlights

The financial crisis of 2008-2009 could be considered to have been the worst financial crisis since the Great Depression of the 1930s
Ii Di,2012 ␧i ϭ denotes the probability of a firm’s undertaking of product innovation as its main focus of long-term business strategy, whereas; ϭ is the probability of the firm’s undertaking of cost-cutting to be the main focus of long-term business strategy; ϭ is a set of firm’s characteristics that may be associated with the decision to undertake a different long-term business strategy, including firm’s size, age, structure, being multinationals and country of control; ϭ is a vector of economic performance indicators, including lagged average wage rate, capital intensity, productivity and profitability; ϭ is a vector of industry dummies at the 35-industry level; ϭ is the dummy variable for year 2012; and ϭ is the error term
As discussed in the methodology section, when we compare the economic performance of firms that engage mainly in product innovation as the focus of long-term business strategy to those that engage mainly in cost-cutting, we rely on observational rather than experimental data

Summary

Introduction

The financial crisis of 2008-2009 could be considered to have been the worst financial crisis since the Great Depression of the 1930s. 3. Research design In the remainder of this paper, using a linked micro database, we examine the business strategies undertaken by providing Canadian firms’ evidence, with a focus on the two dominate long-term business strategies: product innovation and cost-cutting. Ii Di,2012 ␧i ϭ denotes the probability of a firm’s undertaking of product innovation as its main focus of long-term business strategy, whereas; ϭ is the probability of the firm’s undertaking of cost-cutting to be the main focus of long-term business strategy; ϭ is a set of firm’s characteristics that may be associated with the decision to undertake a different long-term business strategy, including firm’s size, age, structure, being multinationals and country of control; ϭ is a vector of economic performance indicators, including lagged average wage rate, capital intensity, productivity and profitability; ϭ is a vector of industry dummies at the 35-industry level; ϭ is the dummy variable for year 2012 (with 2009 being the reference); and ϭ is the error term. We think it is important to provide a descriptive discussion of the profile of Canadian firms in undertaking the two business strategies: product innovation and cost-cutting

The profile of Canadian firms in undertaking business strategies

Findings

Conclusion