Innovation is a process of value creation that involves the application of knowledge and its materialization in new products and processes. In today’s context, a firm needs to decide how to update its innovation capability due to this decision generates a competitive advantage that stems from knowledge management, but it must materialize in the generation of rents. Thus, the first decision for firms to take is whether they wish to invest in innovation activities or not. This decision involves a short-term commitment to costs, which may be heavy, in order to secure longer-term benefits from successful innovation. For instance, the choice between a low-cost but low-payoff labour-intensive process and a high-cost, high-payoff capital-intensive one, depended not just on the actual going rate of discount but the more subjective rate of time preference of the decision-maker. Moreover, this decision also has to take into account elements of genuine uncertainty as well as investment risk. Therefore, one of the challenges in the future of research into innovation lies in analysing the relationship between innovation and the firm’s financial performance. Although innovation is increasingly considered one of the most important competitive sources, there are still large gaps in our understanding of how it affects the performance.
Both the internal generation and the external acquisition of knowledge to innovate are accompanied by a series of drawbacks. Thus, the internal generation of knowledge is a costly process that takes time and may last several years. For instance, firms need mechanisms available to retain their employees and to motivate them to generate knowledge. That, together with the protection of intellectual property, represents costs that must be borne by the firm. On the other hand, the external acquisition of knowledge requires the existence of markets and not all knowledge can be acquired externally, due to the absence of markets or the high cost of the transaction. Moreover, knowledge for which an external market exists is generally standardized, that leads to another disadvantage due to competitors are able to replicate the knowledge more easily. Firms must also consider other costs as the adaptation costs since the new products/processes do not always suit the firm’s internal systems, and for instance staff must be trained or production processes modified. Those changes can increase operation costs, create inefficiencies or slow down the process. In that respect, the integration of different sources of knowledge could retard the process of innovation. Thus, innovation activities involve short-term costs and the relationship between those activities and performance could be hidden by the time-lag between innovation activities investments and the incomes generated. Therefore, the firm must also bear the impact on firm performance of the costs made to obtain its innovations due to the capacity to develop innovations has the potential to generate a longer-term stream of outcomes, but these rents are realized mainly when efficient knowledge application exists. Firms that fail to efficiently and effectively translate their knowledge into innovations cannot expect to realize the competitive advantage potential.
Moreover, the success of innovation process depends on a series of internal and external factors that may facilitate or hinder it. Thus, other of the challenges in the future of research into innovation lies in analysing the moderating effect of other internal and external factors on the relationship between innovation and the firm’s financial performance, one such factor being ownership structure. Since owners have different objectives that influence firm performance differently, and due to the innovation strategy is a decision that requires investments whose outcomes are neither immediate nor certain and involves projects that are generally risky, long-term and idiosyncratic, a firm’s decision to innovate may be conditioned by the ownership structure. On that line, the differences in preferences of owners are based on their time horizons and incentives. For instance, ownership concentration may increase the financial commitment of shareholders since they tend to maintain their investment in the long term and so it is assumed that the innovation strategy is strengthened. Moreover, the presence of large shareholders reduces the possibility of managers feeling pressured by short-term performance and so they could increase the investments on innovation.