Process Innovation

We document the role of process innovation as a distinct source of corporate technological advantage. Using machine-read textual analysis of 90 million patent claims, we provide the first large-sample empirical evidence that operational cost inefficiencies are the primary driver of process innovation. We also find that process innovation delivers significant internal value to firms without negative externalities to competitors. Firms that generate a larger share of economically valuable process patents experience a 6% reduction in operating costs over a period of 5 years, leading to a 16% increase in profits. Furthermore, process patents are associated with a 12% greater self-citation of prior patents by the same innovator, fostering internal knowledge accumulation. Firms that specialize in process innovation supplement their innovation portfolio through the acquisition of non-process innovators but are less attractive M&A targets themselves due to the customized nature of process improvements. Our study highlights that the composition of innovative efforts has implications for firm outcomes and the market for corporate control