Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan's Early Industrialization

52 Pages Posted: 22 Jan 2020 Last revised: 12 May 2022

See all articles by Serguey Braguinsky

Serguey Braguinsky

University of Maryland - Department of Management & Organization; National Bureau of Economic Research (NBER); Osaka University - Institute of Social and Economic Research

Atsushi Ohyama

Hitotsubashi University

Tetsuji Okazaki

University of Tokyo - Faculty of Economics

Chad Syverson

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2020

Abstract

We explore how firms grow by adding products. In contrast to most earlier work on the topic, our conceptual and empirical framework allows for separate treatment of product innovation (vertical differentiation) and diversification (horizontal differentiation). The market context is Japan’s cotton spinning industry at the turn of the last century. We find that introducing innovative products outside of the previously feasible set involves removing the “supply-side constraint” by investing in new types of machines and technologies. This process involves a high degree of uncertainty, however, so firms that take steps in this direction tend to first introduce innovative products on experimental basis. We show that conducting such experiments is a key to firm growth. It not only provides opportunities to capture the market in high-end vertically differentiated products when successful, but also facilitates horizontal differentiation of the firm’s products within its previous technical capabilities. In long-term outcomes over 20 years, the right tail of the firm size distribution becomes dominated by firms that were able to expand in both directions: moving first into technologically challenging vertically differentiated products, and then later applying their newly acquired high-end technical competence to horizontal expansion of their product portfolios.

Suggested Citation

Braguinsky, Serguey and Ohyama, Atsushi and Okazaki, Tetsuji and Syverson, Chad, Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan's Early Industrialization (January 2020). NBER Working Paper No. w26665, Available at SSRN: https://ssrn.com/abstract=3522314

Serguey Braguinsky (Contact Author)

University of Maryland - Department of Management & Organization ( email )

United States

National Bureau of Economic Research (NBER) ( email )

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Osaka University - Institute of Social and Economic Research ( email )

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Japan

Atsushi Ohyama

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Tetsuji Okazaki

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Chad Syverson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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