The Innovation-Based Comparative Advantages of Firms

30 Pages Posted: 7 Sep 2022

See all articles by Zhihao Ma

Zhihao Ma

Shanghai Jiao Tong University

Xi Qu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Le Xu

Shanghai Jiao Tong University (SJTU) - Shanghai Jiao Tong University, Antai College of Economics and Management

Chao Yang

Shanghai University of Finance and Economics

Date Written: August 21, 2022

Abstract

Resource-based theories of product diversification argue that firms grow by diversifying into products that share common capabilities. We bridge the product diversification literature and the innovation literature by documenting the positive correlation between a firm’s innovation-based comparative advantages and the direction of product diversification. By constructing a novel firm-patent-product for China Compulsory Certificate (CCC) products, we find that a higher similarity between a firm and a product in the space of patent fields predicts a higher probability of diversifying into that product. We also find that new products introduced with higher innovation similarities last longer and exit the market with lower probabilities. Based on the intuition of comparative advantages of countries in different products, we interpret our innovation similarities as firms’ comparative advantages that direct product diversification.

Keywords: Product diversification, innovation capabilities, comparative advantages, economies of scope

JEL Classification: F11, L25, M2, O3

Suggested Citation

Ma, Zhihao and Qu, Xi and Xu, Le and Yang, Chao, The Innovation-Based Comparative Advantages of Firms (August 21, 2022). Available at SSRN: https://ssrn.com/abstract=4197666 or http://dx.doi.org/10.2139/ssrn.4197666

Zhihao Ma

Shanghai Jiao Tong University ( email )

huashan road
Xuhui District
shanghai, 200040
China

Xi Qu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Le Xu (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Jiao Tong University, Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai, Shanghai 200030
China
18049961930 (Phone)

Chao Yang

Shanghai University of Finance and Economics ( email )

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