The Financial Rewards of New Product Introductions

There is little question that new product innovation is a cornerstone to firm success. Particularly in technologically dynamic markets like personal computers, new products are central to long-term financial performance. However, exactly how new product introductions influence firm value is less clear. Based on data from firms in the personal computer industry, we study the effect of new product introductions on three key drivers of firm value: profit rate, profit rate persistence, and firm size as reflected in asset growth. We find that new product introductions influence profit rate and size, but not persistence. Interestingly, the effect of new product introductions on profit rate appears to stem from a reduction in selling and general administrative expenditure intensity rather than through an increase in gross operating return. Firm profitability apparently benefits from new product introduction because new products need less marketing support than older products.