Innovation and economic performance in services: a firm-level analysis

This paper explores the two-way relationship between innovation and economic performance in services using a longitudinal firm-level dataset which matches data from the second Community Innovation Survey, CIS II (1993--95), against a set of economic variables provided by the System of Enterprise Accounts (1993--98). The results presented show that innovation is positively affected by past economic performance and that innovation activities (especially investments in ICTs) have a positive impact on both growth and productivity. Furthermore, productivity and innovation act as a self-reinforcing mechanism, which further boosts economic performance. These findings provide empirical support for the endogenous nature of innovation in services and the presence in this sector of competition models and selection mechanisms based on innovation. Copyright 2006, Oxford University Press.