Product Innovations 42

In order to gain returns from innovation expenditure, firms need to yield economic results from innovations. Different indicators have been proposed to measure such economic results. For product innovation, the sales generated by new or significantly improved products have been frequently used both by firms and in innovation statistics. Related to total sales, it pro- vides an indicator of how innovative a firm’s product portfolio is. There are at least two im- portant drawbacks of this indicator when using it for measuring product innovation results across time and firms. First, the indicator captures the gross earnings from product innova- tions but does not show whether product innovations have been sold with profits and at what level of profits. Selling product innovations with a low profit margin may increase sales vol- umes but limit the returns on the innovation expenditure made for these product innovations. Secondly, the sales share of product innovations is strongly affected by the product life cycle as the indicator requires to defining a reference period in which the product innovations had been put on the market. In innovation statistics, a three-year period is being used. If products are outdated rapidly, either because of technological change or because of changes in con- sumer preferences, and are hence replaced by new products after a short period of market presence, the indicator will be higher compared to a situation when products can be sold un- changed for a long term. Nevertheless, the sales share of product innovations has proved to be a useful indicator for firms’ product innovation success in many studies (see Klingebiel and Rammer, 2014; Leiponen and Helfat, 2010; Laursen and Salter, 2006).

Despite the increasing volume of innovation expenditure and an increasing share of innova- tion expenditure in total sales, the sales share of product innovations shows a decreasing trend over the past 15 years (Figure 3-13). In 2000, 20.5 percent of total sales in firms from Germa- ny were new or significantly improved products that have been introduced in the past three years. This share fell to 12.3 percent in 2009 and did not increase much since then. In 2015, 13.3 percent of sales originated from product innovations. The sales share of product innova- tions is highest is R&D-intensive manufacturing (34 percent in 2015) and much lower in all other main sectors. In knowledge-intensive services, about 10 percent of total sales can be at- tributed to new or significantly improved services. In other manufacturing, this share was about 7 percent and in other services about 5 percent. In all four main sectors, the indicator is currently below the level of the early 2000s. The strongest decrease is to be observed in other manufacturing.

Figure 3-13. Share of product innovations in total sales of firms in Germany 2000-2015, by main sector 0 5 10 15 20 25 30 35 40 45 '00 '01 '02 '03 '04 '05 '06* '07 '08 '09 '10 '11 '12 '13 '14 '15 Sh ar e in to ta l s ale s, % _{R&D-intensive manufacturing} Other manufacturing Knowledge-intensive services Other services Total

* Break in series between 2005 and 2006. Source: ZEW, Mannheim Innovation Panel.

Product innovations may represent different degrees of novelty. In order to qualify as a product innovation, the product has to be new or significantly improved from the viewpoint of the innovating firm. Such innovations may often be copied or slightly adapted from other firms. Other product innovations may be new to the market, i.e. they represent a solution that has not been offered yet by any other firm. This type of product innovation is called ‘market novelties’. Note that the market is defined by the innovating firm and may be confined to a geographical market or a market of a specific group of customers. The MIP includes another measure of novelty of product innovation which refers to the fact whether a product innova- tion had any predecessor product within the innovating firm or not. If the latter is the case, the product innovation has opened up a new product line within the firm. These ‘product-line novelties’ may be market novelties at the same time, though firms may adopt product ideas from competitors when entering new market segments. Data on product-line novelties has been collected since the 2003 survey. This indicator is not used in the CIS. From both types of novelties one may expect higher returns for the innovating firm. Market novelties may allow for a higher mark-up and hence higher profits since the innovator enjoys a monopoly position at least for some time. Product-line novelties may accelerate sales levels as firms approach new group of customers or offer new types of offerings to their existing customers. Higher sales growth may transfer to decreasing unit costs if firms are able to leverage scale econo- mies.

The share of market novelties in total sales was 3.0 percent in 2015, implying that only 22 percent of all sales with product innovations were generated by new-to-the-market products. The share of market novelties in total sales of product innovations has been quite steady for

cent. Product-line novelties account for a similar share in total sales. In 2015, the indicator was at 2.9 percent, compared to 5.8 percent in 2002.

Figure 3-14. Share of novel product innovations in total sales of firms in Germany 2000-2015, by main sector 0 1 2 3 4 5 6 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Sh ar e in to ta l s ale s, %

Sales share market novelties Sales share product-line novelties

* Break in series between 2005 and 2006. Source: ZEW, Mannheim Innovation Panel.

Figure 3-15. Share of product innovators in Germany 2006-2015 by novelty of product innovation

0 5 10 15 20 25 30 35 40 45 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Sh ar e i n al l f ir m s, %

Neither market novelties nor product-line novelties Only product-line novelties, no market novelties Only market novelties, no product-line novelties Both market novelties and product-line novelties

Source: ZEW, Mannheim Innovation Panel.

The very similar values for market novelties and product-line novelties suggest that the two types of product innovation may overlap to a large extent. While the MIP does not survey the two indicators in a way that would allow for calculating the overlap, data on the share of firms

with these types of product innovation show a rather small overlap (Figure 3-15). In 2015, 5.3 percent of all firms introduced both market novelties and product-line novelties while 2.5 per- cent had market novelties but no product-line novelties, and 6.3 percent had product-line nov- elties but no market novelties. This means that only 37 percent of firms with either of the two types of novelties had both of them. This share was about 45 percent in the years 2006 to 2010 but declined as the share of firms with market novelties and the share of firms with product-line novelties has been declining too. In 2015, 7.7 percent of all firms had market novelties, compared to 13.1 percent in 2006. For product-line novelties, the respective shares are 11.6 percent and 17.9 percent. The share of firms with neither market novelties nor prod- uct-line novelties has also been decreasing, from 15.6 to 12.8 percent.

For market novelties, the CIS added two additional questions beginning with the reference year 2012. A first question asked about the geographical market to which the novelties refer to, distinguishing national, European and world market. A second question asked for the share in total sales that have been generated by market novelties that were new to the world. While the CIS provided pre-defined categories to be ticked, the MIP asked for the actual percentage. This allows calculating the exact share of sales from now-to-the-world product innovations.

Figure 3-16. Share of firms with market novelties by geographical market, and sales share of new- to-the-world product innovations in Germany 2012 and 2014

Market novelties by geographical markets Sales with new-to-the-world product innovations

0 1 2 3 4 5

New for the German

market

New for the European

market

New for the world market Sh ar e i n al l f ir m s, % 2012 2014 0 1 2 3 4 5 R&D-intensive manufacturing Other manufacturing Knowledge- intensive services Other services Total

Share in total sales, % 2012 2014

Source: ZEW, Mannheim Innovation Panel.

The results from the first question show that in 2014, 4.5 percent of all firms introduced at least one market novelty that was new to the world (Figure 3-16). This share was almost the same two years before (4.4 percent). Compared to all firms with market novelties, 51 percent (2014) had at least on new-to-the-world market novelty. In 2012, this share was somewhat smaller (44 percent). In 2014, 4.1 percent of all firms reported to have introduced a market novelty that was new to the world. 1.5 percent of all firms introduced market novelties that

Europe was lower in 2014 as compared to 2012. In 2014, 1.0 percent of all sales of firms from Germany (within the target population of the MIP) were due to new-to-the-world product in- novations. This share went down from 1.2 percent in 2012. The highest share is reported by R&D-intensive manufacturing (3.3 percent in 2014, 4.4 percent in 2012). In the other three sectors, new-to-the-world product innovations contribute a tiny share to total sales ranging be- tween 0.6 percent (knowledge-intensive services) and 0.2 percent (other services).