DYNAMIC ANALYSIS OF INNOVATION — PROFITABILITY NEXUS IN SERVICE FIRMS: AN OUTLOOK OF A SMALL SERVICE ECONOMY

Research suggests that while firms may make substantial investments in innovation to increase returns, they can still encounter unpredictable results that lead to financial setbacks. As the reason for this perception fuels an ongoing investigation, this research contributes to the discussion for improved understanding. Specifically, it investigates 1,847 Norwegian service firms using the Generalised Method of Moments (GMM) system estimators of dynamic panel data models. Its empirical findings indicate that innovation has an immediate and strong positive impact on profitability. Moreover, innovation impacts service firms with a negative short-term lag profit effect and a positive profit effect in the medium term. However, the medium-term positive impact of innovation on profitability is lower in magnitude than the immediate term. Suggesting that the lasting profit effects induced by innovation may be constrained, and continuous innovation management is essential to sustaining these benefits over time. Additionally, the analysis reveals a positive correlation between past and current profitability values. Suggesting an interesting dynamic: financial gains can act as a catalyst for further innovation.