University of Southern California

Index Innovative Firms

Summary

Innovation is widely acknowledged as an important but difficult construct to measure. Currently indices of the most innovative corporations rely on soft data such as polls or subjective judgments of raters. This page describes an index for ranking the most innovative corporations that is based on hard market data. The index uses five metrics of innovation. The unique feature of these metrics is that they are based on market data that is publicly available. Various portfolios of most innovative corporations (top 20, 30, or 40) based on this index, significantly and substantially outperform the S&P 500 in up markets and do almost as well in down markets, both concurrently and one year ahead. Furthermore, the risk associated with such portfolios is less than 1 in two years and equal to 1 in one year. Thus, these returns occur without excessive risk. Investing $10,000 each year in the top 20 portfolio yields 46% more than doing the same in the S&P 500 for concurrent years and 23% more for one-year-ahead performance. These results lend some credibility to the importance of innovation, the value of the metric, and the need for monitoring and measuring corporate performance on innovation.

Rationale

Innovation is vital for consumers, corporations, and nations. It is probably the main driver of the improvement in consumers' living standards, the growth and success of corporations, and the wealth of nations. Analysts, corporations, and nations are eager for a means of measuring innovation. Such a measure has many benefits. It can reveal the corporations that investors or governments should back. It can allow corporations to benchmark where they stand among competitors and what changes they need to make to improve. And it can enable managers to focus on those drivers of innovation that provide the best financial payoff.

Currently, two of the most widely reported global indices of innovation are based on polls of managers or investors. Polls suffer from the tyranny of hype. Names that get early recognition get greater visibility in the press, which accentuates their popularity, leading to a positive cascade in their favor. Rankings based on polls may overlook fundamental drivers of corporate innovation, future market performance, and wealth creation. Thus, the proposed index is based on hard market data rather than soft opinion polls.

We sought to identify a set of measures that would enable an objective ranking of corporations on innovation. This set of measures would meet the following criteria: 1) The measures avoid excessive redundancy and burdensome data collection. 2) The measures are market based, allowing us to collect publicly available market data via objective rules. 3) The combination of measures enables a ranking of corporations that exhibits superior performance on some objective criterion. Currently, one of the strongest criteria is the stock market performance of a corporation. Prediction of one-year-ahead stock market performance is probably the strongest criterion of performance.

Method

Our extensive prior research on innovation1 led us to five metrics of innovation that capture various important aspects of the construct. These five metrics fall into three categories: (1) Innovation-Attitude (2) Innovation Development, and (3) Innovation Output. We carried out a study of a sample of the largest US corporations and those considered innovative over a period of five years.

The detailed method, including metrics, data collection, and sampling, can be obtained from the USC Marshall Center for Global Innovation innovation@marshall.usc.edu.



1Sood, Ashish and Gerard J. Tellis (2009), "Do Innovations Really Pay Off? Total Stock Market Returns to Innovation,," Marketing Science, 28, 3 (May-June), 442-456.
Manjit S. Yadav, Jaideep C. Prabhu, and Rajesh K. Chandy (2007), "Managing the Future: CEO Attention and Innovation Outcomes," Journal of Marketing (Oct. 2007).
Tellis, Gerard J., Yiding Yin, and Rakesh Niraj (2009), "Does Quality Win: Network Effects versus Quality in High Tech Markets," Journal of Marketing Research, XLVI, 2 (March-April), 135-149.
Tellis, Gerard J., Jaideep Prabhu and Rajesh Chandy (2009), "What Drives Innovativeness of Firms Across Nations? A Culture for Innovation," Journal of Marketing, 73, 1 (January), 3-23.
Tellis, Gerard J and Johnson, Joseph (2007), "The Value of Quality: Stock Market Returns to Published Quality Reviews," Marketing Science , 26, 6 (November-December), 742-756.


Current Research

Current research is extending the study to the years 2009 and 2010. It also focuses on obtaining market based metrics for the following attitudinal and practice dimensions that have been shown to be important drivers of the innovativeness of corporations:2 willingness to cannibalize successful products, tolerance for risk, empowerment of product champions, incentives for enterprise, and internal markets.



2Tellis, Gerard J., Jaideep Prabhu and Rajesh Chandy (2009), “Innovation of Firms Across Nations: The Pre-Eminence of Internal Firm Culture,” forthcoming Journal of Marketing.

Conclusions

Innovation is widely acknowledged as an important but difficult construct to measure. Based on extensive prior research, we identified five variables that can consistently measure innovation. These variables span the constructs of innovation attitude, innovation development, and innovation output. We argue and show that the innovation of corporations can be captured by this set of five metrics that can be appropriately combined into a single index of innovation. Innovation should translate into superior stock market performance. Indeed, we found over the years of 2004 to 2008, portfolios of highly ranked corporations on this metric of innovation outperformed the S&P 500 in up markets and did almost as well in down markets. One year-ahead performance also looked quite good. Furthermore, the risk associated with such portfolios is less than 1 in two years and equal to 1 in one year. Thus, these returns seemed to be obtained without excessive risk. Investments in portfolios of the most innovative corporations cumulatively yield greater returns than similar investments in the S&P 500. These results lend some credibility to the importance of innovation, the value of the metric, and the need for monitoring and measuring corporate performance on innovation.

Acknowledgments

Research on the index was supported by a grant of Don Murray to the USC Marshall Center for Global Innovation.

Authors

This study was conducted under the supervision of Gerard J. Tellis and Andreas Eisingerich.

Gerard J. Tellis is Director of Center for Global Innovation, Neely Chair of American Enterprise, and Professor, in the Marshall School of Business, University of Southern California. Professor Tellis is an expert on innovation with over 100 published articles and 4 books, which have won 15 awards.

Andreas B. Eisingerich is Assistant Professor in Marketing, Imperial College Business School, Imperial College London, UK. Professor Eisingerich publishes in top academic and practitioner oriented outlets.