PRODUCTION AND OPERATIONS MANAGEMENT Vol. 2, No. I, Winter 1993 Prinred in U.S.A. INNOVATION STRATEGY AND FINANCIAL PERFORMANCE IN MANUFACTURING COMPANIES: AN EMPIRICAL STUDY * SHAKER A. ZAHRA AND SIDHARTHA R. DAS Department of Management, College of Business Administration, Georgia State University, Atlanta, Georgia 30303, USA Department of Decision Sciencesand MIS, School of Business Administration, GeorgeMason University, Fairfax, Virginia 22030, USA An innovation strategy for the manufacturing function covers four areas: a firm’s desired innovation leadership orientation (i.e., being a leader versus being a follower), its level of emphasis on process and product innovation, its use of internal and external sources of innovations, and its intensity of investment in innovation. We examine two models of the association between manufacturing companies’ innovation strategy and their financial per- formance. The first examines the variations in company financial performance as a function of the simultaneous effect of the dimensions of innovation strategy. The second is a sequential model that suggests a causal sequence among the dimensions of innovation strategy that may lead to higher performance. We used data from a sample of 149 manufacturing com- panies to test the models. The results ( 1) support the importance of innovation strategy as a determinant of company financial performance, (2) suggest that both models are appro- priate for examining the associations between the dimensions of innovation strategy and company performance, and (3) show that the sequential model provides additional insights into the indirect contribution of the individual dimensions of innovation strategy to company performance. Finally, we discuss the implications of these results for managers. (MANUFACTURING INNOVATION; INNOVATION STRATEGY; COMPANY PERFORMANCE) 1. Introduction Concern over the global competitiveness and productivity of American manufac- turers has drawn attention to the importance of a company’s manufacturing inno- vation activities to its financial performance (Thurow 1992). Manufacturing inno- vation includes creating, refining, and extending products, processes, and technologies. Such innovations can improve the global standing of US manufacturing companies and help them regain their status as world-class producers. By using new technology, creating and commercializing or marketing new products, and adopting innovative manufacturing processes, American companies’ can effectively solve their competitive problems ( Swamidass 1986 ) . * Received August 1992; revision received June 1993; accepted September 1993. 15 1059-1478/93/0201/000$1.25 Copyright Q 1993, Production and Operations Management Society