The Role of Management Capacity in the Innovation Process for Firm Profitability

Abstract

This paper studies the relation between firm managerial capacity in doing innovation and firm profitability. The approach taken is at the intersection of evolutionary/neo-Schumpeterian theory and the resource-based view of the firm. Utilizing a stochastic frontier analysis, we provide a direct measure of the innovation management capacity which is then plugged into a profit margin equation, augmented by the traditional Schumpeterian drivers of profitability. We run both ordinary least squares and quantile regressions.Results show evidence of an average positive effect of the innovation managerial capacity on firm profitability, although quantile regressions show that this mean effect is mainly driven by the stronger magnitude of the effect for lower quantiles. This means that less profitable firms (i.e. the smaller ones in our sample) could gain more from increasing managerial efficiency for innovation in comparison to more profitable (larger) businesses.