Abstract:

 In the era of globalization and with the advent of knowledge economies, organizational innovation has assumed a critical role in enhancing economic performance of firms. Proponents of the “Resource Based View” of the firm and its more recent extensions such as the “Knowledge Based View” and “Dynamic Capabilities Theory” have suggested that  generation, diffusion and application of organizational knowledge could be the source of sustained competitive advantage and superior performance of firms. Innovation has also been found to enhance new product development, increase profitability of a firm, improve export performance of a firm,  and act as a competitive barrier.  While there is near unanimity in accepting the vital role of innovation in a firm’s performance, consensus on what constitutes organizational innovation and how to measure it  has proven to be elusive so far.  Most previous research in this area has conceptualized innovation through one or more dimensions of a firm’s innovative capability such as R&D of a firm.  The measurement of the construct has thus reflected this narrow conceptualization with a single measure such as R&D expenditure of a firm being the most often used proxy.  This study utilizes a broader definition of organizational innovation capabilities that includes the generation, dissemination and strength of innovative activity in a firm. Such a composite measure is then used to predict market value of a firm.  The unique features of this study are that it uses multiple indicators of firm innovation, it uses panel (cross sectional, time series) data on a firm’s innovation profile along with lagged measures of market value. It also utilizes a fixed effect panel data research methodology in order to significantly improve external validity of the results.