Differential effects of product and service innovations on the financial performance of industrial firms

Industrial companies face the particular challenge of developing new products and services in traditionally goods-centered environments. Using panel data from 558 German industrial companies, this article analyzes the financial performance consequences of product and service innovations. The analysis confirms a positive impact of product innovations on both revenue and profitability growth, whereas the profitability of an average industrial company remains unaffected by its service innovation activities, pointing to the challenge of managing the costs of service innovation in goods-centered environments. A moderation analysis provides a finer grained view: Isolating mechanisms, such as the complexity of market offerings and financial innovation barriers, disrupt the link between innovation and profitability growth for both innovation types. Specifically, they make service innovations more profitable but have detrimental effects on product innovation profitability. Factors that traditionally hinder financial success with product innovations actually provide effective safeguards for service innovations.