Innovation's Effect on Firm Value and Risk - Insights from Consumer Packaged Goods

The provided text is an excerpt from a 2008 Journal of Marketing article by Alina B. Sorescu and Jelena Spanjol, examining Innovation’s Effect on Firm Value and Risk within the consumer packaged goods (CPG) industry. The authors differentiate between breakthrough innovation and incremental innovation, analyzing how each type affects three facets of firm performance: normal profits, economic rents, and total firm risk. Based on data from over 20,000 new CPG products, the findings indicate that breakthrough innovation is associated with increases in both normal profits and economic rents, as well as an increase in firm risk, which is compensated for by above-normal stock returns for shareholders. Conversely, incremental innovation only correlates with an increase in normal profits and has no significant impact on economic rents or firm risk. Ultimately, the research provides a framework for understanding the distinct financial value and associated risk of different types of innovation for a firm and its stakeholders.