Innovation and Financial Performance in Emerging Countries: An Empirical Analysis of Korean and Chinese Firms

This paper suggests a new way of operationalising innovation capabilities of firms by incorporating intensity, scope and spillover effects of innovation. Based on panel data estimation of Korean and Chinese listed firms in high technology industries over four years, this study shows that innovation output (i.e. patent intensity) rather than innovation input (i.e. R&D intensity) contributed to firm financial performance. It also indicates that the innovation strategy developing the depth of innovation capability in a few specific technological fields may be the source of better performance in Korea, while diversified innovation capabilities over different technology fields might be having positive effects on firm performance in China. The empirical result on the moderating role of the scope of innovation capabilities shows that the effects of R&D investment on firm performance depend on appropriate innovation strategy determining the scope of innovation. This outcome suggests that, when R&D investment does not match the depth and diversity of innovation capabilities of firms and related strategies, this hampers the financial performance of firms. Finally, my empirical evidence documents that technologically related innovation efforts of other firms is a significant predictor of financial performance with the firms¡Ì? own innovation efforts (e.g. in-house R&D).