Does Innovation add value?

Over the last five to ten years, innovation has become something of a mantra for many organizations, something like sustainable or green or a number of other concepts. Easy to say, welcomed in the marketplace, exceptionally difficult to measure. So, a firm gains a lot of goodwill by claiming to be innovative, or green, without necessarily proving it.

The question becomes, does innovation really add value for a firm? Is there an ROI - a return on innovation? Can that return be achieved through random fits and starts to become more innovative? Is there demonstrable evidence that consistent, sustainable innovation pays dividends to the corporation and more importantly the shareholders?

Let's look first at Sanjay Dalal's innovation index. Sanjay asked this same question and decided to build an innovation portfolio. Sanjay selected a number of firms that are known as innovators and started tracking these stocks against a number of index averages and benchmarks. While the approach is a bit crude, since these handful of firms is tracked against an entire market, Sanjay's index demonstrates that innovative firms drive significantly more value in terms of market value and shareholder value than other firms in the same industries.

Where does that value come from? Well, most firms in this index are generating new products or services, and can command a higher price point and more margin from those innovative products and services. Apple makes MP-3 players that generate significantly more margin per player than other MP-3 players, for example. Another point of value that drives shareholder wealth, however, is the intellectual property and capital that these firms are building.

In a study from 2005, two economists in the US, Hassett and Shapiro, found that the US economy generates $5 trillion a year in GDP based on its intellectual property - almost 42 percent of the total GDP of the US. Where is that value being generated? In innovative companies that create new intellectual property like new ideas, new patents, new content and other valuable intellectual content. Increasingly, the US and other "post modern" economies are creating value by creating ideas.

So, if the US shows a surplus of intellectual property, can that translate to value for a corporate or shareholder? Absolutely. Increasing the value of a company's assets, whether those assets are buildings and machines or ideas, patents and content, drives value for the firm and value for the shareholder.