Innovation Does Pay Off–If You Measure Correctly

Innovation is probably one of the most important forces fueling the growth of new products, sustaining incum-bents, creating new markets, transforming industries, and promoting the global competitiveness of nations. However, some critics assert that an earnings-focused, short-term orientation on boosting stock price may un-dercut investments in innovation that typically have a long payoff. These critics assume that stock markets respond positively to announcements of immediate earnings but negatively to announcements of investment in innovation that have an uncertain long-term payoff. As a consequence, many fi rms may not be investing enough in innovation, and some analysts fear that the U.S. may be losing its competitive edge as a result. Firms may under-invest in R&D because of the high costs,