A Longitudinal Study of the Impact of R&D, Patents, and Product Innovation on Firm Performance Kendall W. Artz, Patricia M. Norman, Donald E. Hatfield, and Laura B. Cardinal Because of increasing levels of competition and decreasing product life cycles, a firm’s ability to generate a con- tinuous stream of innovations may be more important than ever in allowing a firm to improve profitability and maintain competitive advantage This paper investigates several issues that are central to an examination of the innovation productivity in a firm. First, the relationship between a firm’s commitment to research and development and its innovative outcomes is examined. Two innovative outcomes are analyzed: (1) invention, which focuses on the development of new ideas; and (2) innovation, the development of commercially viable products or services from creative ideas. Invention is measured by the number of patents granted, and innovation is assessed by the number of new product announcements. Second, because many inventions ultimately result in marketable innovations and because patents may provide protection for new products, the relationship between patents and product announce- ments is also investigated. Finally, the ability of a firm to benefit from its inventions and innovations is studied by examining their separate effects on firm performance, measured as return on assets (ROA) and sales growth. Drawing from a sample of 272 firms in 35 industries over 19 years, the results from a model of simultaneous equations provided support for some of the hypotheses, but several other surprising findings were found. As expected, R&D spending was positively related to patents. This finding is consistent with others who argue that internal research capabilities, particularly those with a strong basic research component, is key to enabling a firm to generate creative outputs. More surprising was the finding of increasing returns to scale to R&D spending. While this con- tradicts much of the existing research, it is consistent with economic arguments for the advantages of scale in innovation. Also interesting is the finding that, while a significant curvilinear relationship exists between R&D spending and product announcements, it is not the predicted inverse-U but instead a U-shaped relationship. Con- sistent with previous work, product announcements were found to be positively related to both performance mea- sures. A negative relationship was found between patents and both ROA and sales growth. While these findings were unexpected, they are intriguing and call into question the value of patents as protection mechanisms. In addition, these results may be resulting from the rise of strategic patenting, where an increasing number of firms are using patents as strategic weapons. As expected, a positive relationship was found between patents and new product announcements. Introduction T he ability of firms to develop and exploit their innovative capabilities is widely recognized as a critical determinant of firm performance and competitive advantage (Bettis and Hitt, 1995; Helfat and Peteraf, 2003; Voss, 1994). A firm’s abil- ity to generate a continuous stream of innovations may be more important than ever in allowing a firm to develop or maintain competitive advantage because of the increasing levels of competition and decreasing product life cycles. In an environment whereby com- petition is intense, the profits generated by any one innovation may be transitory (Greenhalgh and Lon- gland, 2005). Conversely, a relatively rapid stream of multiple innovations over time may enable the firm to continue to generate high levels of profitability (Bar- czak, 1995; Roberts, 1999). For these reasons, effec- tive management of the innovation process continues to be a focal concern for managers and business researchers (Bogner and Bansal, 2007; Marsh and Stock, 2003). In this paper, several issues are investigated that are central to an examination of the innovation produc- tivity in a firm. First, the relationship between a firm’s commitment to research and development and its in- novative outcomes is examined. In evaluating a firm’s innovative activities, it is recognized that the literature has differentiated between invention and innovation, and thus both forms of innovation outcomes are in- Address correspondence to: Kendall W. Artz, Hankamer School of Business, Baylor University, One Bear Place #98006, Waco, TX 76798- 8006. Tel.: (254) 710-4169. Fax: (254) 710-1093. E-mail: Kendall_ Artz@Baylor.edu. J PROD INNOV MANAG 2010;27:725–740 r 2010 Product Development & Management Association