examine the innovation theory of profit?

Answer 1

It was certainly argued during the tech stocks boom of 1999/2000 that the higher a company's research and development expenditure relative to its size (measured by some consistent yardstick such as turnover or past profits or capital employed), the bigger its profit growth in future would be.

Bullsh*t of course, like all such simple models.

But bullsht with an element of truth, because innovation can lead to product differentiation (which leads to higher gross margins and therefore higher profitability), and/or to marketing success (ditto). Drug and software companies mostly make noticeably more money from new drugs and software than old ones, for examples.

Bullsht nevertheless as a generalisation because (a) some innovations don't sell or sell badly (like G3 in mobile telecoms); (b) there are other ways to increase profits, such as expansion into new markets, or cost cutting, or better marketing, etc.