Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan's Early Industrialization
Serguey Braguinsky, Atsushi Ohyama, Tetsuji Okazaki, Chad Syverson
American Economic Review · 2021 · Volume 111 · Issue 12
Abstract
We explore how firms grow by adding products. We leverage detailed data from Japan's cotton spinning industry at the turn of the last century to do so. This setting allows us to fully characterize the type of differentiation (vertical or horizontal) of new product introductions as well as whether the product is within or outside of the firm's prior technological capabilities. We find that trying to introduce innovative products beyond the firm's previous technologically feasible set, even if such trials fail, is a key to firm growth. Indeed, it mostly facilitates growth through the firm's later success in horizontal product diversification. In long-term outcomes, the right tail of the firm size distribution becomes dominated by firms that first moved into technologically challenging products and then later applied their newly acquired technical competence to horizontal expansion of their product portfolios. Two mechanisms through which this knowledge transfer occurs are greater production system flexibility and higher product appeal to downstream buyers.
Keywords
Firm Behavior: Empirical Analysis, Production, Pricing, and Market Structure, Size Distribution of Firms, Other Consumer Nondurables: Clothing, Textiles, Shoes, and Leather Goods, Household Goods, Sports Equipment, Economic History: Manufacturing and Construction: Asia including Middle East, Micro-Business History: Asia including Middle East, Innovation and Invention: Processes and Incentives, Technological Change: Choices and Consequences, Diffusion Processes
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