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This chapter investigates the relationship between product innovation and firm performance. We apply a logistic regression to predict product innovation using a number of explanatory variables of which firm growth is of principal interest. We study the relationship at two different time periods using two comparable questionnaire surveys. These are combined with accounting statistics and labor market data. We find that firms which are experiencing high growth rates also are more likely to have been product innovating. We also find support for the user-producer theorem and that Schumpeter may have been right in his hypotheses concerning firm size and innovative activities.

In this chapter it is shown that, in spite of the fundamental importance for economic growth of product innovation, standard economic theory – neo-classical as well as transaction cost approaches to industrial organization – tends to neglect it. It is also shown that moving the focus to product innovation leads to very different conclusions on how alternative institutional set-ups affect economic performance. Institutional set ups assumed to optimise allocation and minimise transaction costs do not support innovation and growth. That is why producer goods where innovation is a regular phenomenon are transacted neither in pure markets nor in hierarchies. The omnipresence of “organized markets” reflects the need for users as well as producers to engage in on-going information exchange and interactive learning in connection with product innovation.

The aim of this book is to contribute to the understanding of product innovation – how it takes place and how it affects the economy. Our analysis of product innovation links it to interactive learning and to the performance of firms. On the basis of unique data sets and detailed case studies we study the interconnections between these three elements from different angles. We believe that the book will prove helpful for managers, employees and policy makers as well as for all those in academia who wants to understand the role of product innovation in the economy.

The aim of the paper is to identify the different directions of external knowledge search and to investigate their individual effect on performance at the firm level.

The empirical study is based on survey data gathered from two distinct informants of 248 large- and medium-sized high-tech manufacturing Spanish firms. In dealing with concerns on simultaneity and reverse causality, perceived time-lags among dependent and independent variables were introduced. Quantitative methods based on questionnaire answers were used.

Findings reveal six distinct external search patterns and indicate that, while market sources such as customers and competitors are positively associated with performance, knowledge acquired from general information sources, other firms beyond the core business and patents and databases have no significant effect. Moreover, knowledge obtained from science and technology organizations and from suppliers displays an inversed U-shaped effect on firm performance.

Conclusions can only be generalized to high-tech manufacturing firms from developed countries and, although well-established methodological procedures were followed, the nature of the study remains cross-sectional. Yet, an important implication emerges from this work: more openness to external knowledge is not always better. It is necessary to carefully evaluate the potential gains and pains of each type of partner and source.

This research provides guidance to managers about how to shape their companies’ inter-organizational networks, i.e. the specific external agents on which they should focus, as well as the efforts they should devote to each of these key partners.

By considering distinct directions of external knowledge search instead of a single dimension, the paper contributes to shed some more light to the mixed results reported by the scarce empirical studies that have investigated the effect of openness towards external knowledge on performance at the firm level.