Modeling the virtuous circle of innovation. A test on Italian firms

This article investigates the "virtuous circle" between innovative inputs, outputs, and economic performance with a three-equation model highlighting feedback loops and simultaneous relations. An empirical test is conducted of innovative expenditure, innovative sales, and economic results in a sample of Italian manufacturing firms, comparing occasional and serial innovators. The data, for 1998-2007, are drawn from a rich panel of Italian firms with 20 or more employees compiled by the Italian National Institute of Statistics including three waves of Community Innovation Surveys. The model extends that developed at the industry level by Bogliacino and Pianta (Industrial and Corporate Change, 2013a, 22(3), 649-678; Innovation and demand in industry dynamics: R&D, new products and profits, in A. Pyka and E. S. Andersen (eds), Long Term Economic Development, Economic Complexity and Evolution. Springer-Verlag: Berlin, 2013b) and confirms those earlier findings. For the core of persistent innovators, there are complex links at play in different phases of the innovation process and in the feedback between economic success and sustained innovation expenditure.