Measuring process innovation output in firms: Cost reduction versus quality improvement

Process innovation is an important part of the innovation activities of firms and supposed to significantly contribute to the returns from innovation. Analysing this link is complicated, however, due to a lack of quan-titative indicators on the outcome of process innovation. This article presents empirical evidence on such quantitative measures that have been collected in the German part of the Community Innovation Survey (CIS). Two main output dimensions are distinguished. The share of unit cost reduction owing to process innovation represents the extent to which new process technology affects a firm's cost function. The increase in sales that can be attributed to higher product quality resulting from new or improved process technology is linked to the impact of process innovation on a firm's demand function. The empirical analysis based on firm-level panel data shows that the link between firm characteristics, firm performance and the two types of output differs as ex-pected by conceptual considerations. The results suggest that the two proposed measures of process innovation output are useful indicators to capture the type and magnitude of the outcome firms obtain from their process innovation efforts.