The impact of innovation to improve the profitability of companies is something that has always been assumed, but nonetheless, it’s nice to have some tangible evidence to show it’s the case. The latest such evidence comes via research from the University of Technology Sydney, which shows how the most innovative Australian companies are also those that post the highest profits and stock returns.
The researchers looked at patent data for 1296 ASX-listed companies from 1997 to 2018, before pairing this data with financial reports and stock market trends over that same period. They found that the most innovative firms achieved 1.95% higher growth in profitability each year than their less innovative peers.
“Despite calls for more innovation to promote economic growth in Australia, to reduce the reliance on commodities and tourism, there was a lack the evidence on whether innovation generates greater financial returns,” the researchers say.
“Evidence of a strong link between patent filings and future earnings should encourage businesses to invest in innovation. The findings also provide a strong argument for the Australian government to develop further incentives to support corporate innovation.”
Innovative growth
The researchers used unique data from the Australian Patent Office, which revealed that around half of Australian companies had no patents listed at all, with a further 616 categorized as low innovators, leaving just 48 in the “medium” category and 31 in the “high” category.
The analysis shows that Australian firms are, in general, less innovative than their American peers, and made smaller investments in R&D, which resulted in fewer patents being registered. This is despite the firms being similar in size.
Australia currently ranks just 23rd in the Global Innovation Index, but is a lowly 59th for “innovation efficiency”, which measures how successfully research is translated into commercial outcomes.
What does appear from the analysis, however, is that investors are well capable of gauging the value of innovation and pricing it into the value of stocks. The researchers believe this is crucial as this can help to guide innovation strategy.
“While research from the US suggested investors are not good at pricing future gains from innovation, our study showed Australian investors are better able to understand the competitive advantage of innovation and factor this into share prices,” they explain.
“This is likely due to the relatively limited patent filings activities taking place in Australia, and the two-tier patenting systems that distinguishes between ground-breaking and incremental innovations.”
The researchers believe their work highlights the importance of companies communicating the innovation pipeline they’re working on with investors while also ensuring that patent data is readily accessible.
“Our research shows the importance of a patenting system that can facilitate investors’ understanding of corporate innovation, however Australia’s two-tier patenting system is currently being phased out, which could hinder access,” they conclude.
