Success Breeds Success. The Dynamics of the Innovation Process.

This paper presents a dynamic random effects probit model for the realization of private firms' product and process innovations. We estimate the model with panel data collected by the Ifo Institute in Munich. The data covers the period between 1979 and 1986 and includes 301 firms of the West German manufacturing sector. It turns out that firms' probabilities of innovation depend on market structure, demand and cost expectations, unobserved heterogeneity, and realized innovations in the previous year. The positive significant influence of past innovations indicates that there is strong state dependence in the innovation process. This result supports the "success breeds success" hypothesis suggesting a positive impact of innovative success to further innovations in the following years.