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In this paper a theoretical model of the impact of product and process innovations on output, capacity utilization, employment and prices is developed. The model is estimated with a unique set of micro‐data from West German manufacturing firms. The empirical results reveal that innovative firms are more successful. They show a higher utilization and more output and employment growth than non‐innovative firms. Innovations also change market behaviour. In sectors with a large share of product innovators, firms more often change employment and less often change prices, i.e. product innovations reduce price competition.
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Werner Smolny (1998) studied this question.
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