Profit Differentials and Innovation

The article aims to investigate empirically the effects of innovative activities on corporate profitability, using a panel of 267 UK manufacturing firms, over the period 1988–1992. Using the Bayesian approach to, explicitly, consider heterogeneity among firms, we find: (i) a positive and well-determined effect of innovation on profits that smoothly decreases as time passes by; (ii) a difference in profitability between innovators and non-innovators, greater when the comparison is between persistent innovators and non-innovators; and (iii) a long-run persistence in profit differentials.