• Chart of the Week
  • December 20, 2021

Horizontal growth

A cotton spinner from 1907.

Wikimedia Commons

Successful companies innovate as they grow, pushing technological boundaries to expand their product offerings. 

But it’s not clear how these technological innovations actually drive growth. Is it because innovation leads to game-changing products that expand the business or because envelope-pushing technology improves existing products?

In a paper in the American Economic Review, authors Serguey Braguinsky, Atsushi Ohyama, Tetsuji Okazaki, and Chad Syverson explore these dynamics in Japan’s cotton spinning industry at the turn of the 20th century.

 

 

Figure 1 from Braguinsky et al. (2021)

Figure 1 shows the relationship between product variety and output at Japanese cotton spinners between 1893 and 1913. Panel A plots the average output at companies (blue line) alongside the number of product varieties (orange line). The dotted lines smooth out the data to show the general trend. The average number of product varieties was mostly flat until about 1899, but then increased after the turn of the century. From then on, product variety and growth tracked each other quite closely, with product variety expansion leading output growth around 1907. Meanwhile, panel B shows that both high- and low-end products increased after a certain point, but high-end variety growth started earlier and maintained a lead over the increase in the number of low-end product varieties. 

The authors find that trying to introduce innovative products is key to a company’s growth, even if those innovations fail, because it helps foster “horizontal” growth by using what they learned to improve and diversify existing products. The research offers unique insights into how envelope-pushing companies diversify their portfolios as they grow.

“Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan’s Early Industrialization” appears in the December 2021 issue of the American Economic Review.