The Effects of Innovation

iPad

Is more innovation good for stocks? Given the success of Apple after the release of new products such as the iPhone or surging stock price of electric car manufacturer Tesla Motors, it may seem obvious that new innovations lead to better investment returns. But for the stock market overall, or even an entire sector of the market, that’s not necessarily the case.

The reason is that the gains from innovation for one company often come at the expense of other companies. Apple’s success in selling iPhones and iPads, for example, resulted in lower sales for competitors such as Blackberry, Dell, Hewlett Packard, and Nokia. And innovation can force everyone in a sector to have to spend more on research and development to keep pace, leading to lower profits for other companies even if their sales don’t decline.

Furthermore, the gains from innovation sometimes go to companies that aren’t listed on the stock market (such as smaller startups), so stock market investors don’t benefit. Until its initial public offering in 2012, for example, the increases in Facebook’s value from the growth of its social network only went to private investors such as venture capitalists. But its growth may still have hurt publicly-traded internet companies, such as Google and Yahoo!, which had to compete with Facebook.

That doesn’t mean innovation is “bad”. Innovation is almost certainly good for the people who get to use the new products, and for the economy as a whole. But just like when companies raise prices to increase their profits, what’s good for consumers may not always be good for the stock market.

Topics: Blog Stock Market Facebook Innovation Apple Tesla