Firm Scope and Innovation: The Role of Intangibles

Cagin Keskin

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Horizontal expansion through an expanding product portfolio lies at the core of modern endogenous growth literature. However, evidence remains limited on how diversification across industries influences a firm's trade-off between generating social surplus and maximizing private returns. To investigate this, I categorize intangible assets by their spillovers: transferable intangibles (patents, software) generate social surplus, whereas embedded intangibles (organizational capital, brand value) primarily yield private returns. I document that diversified firms reallocate investment toward embedded intangibles, while at the same time having lower markups and productivity, as well as less competitive threats. Motivated by this evidence, I extend a canonical endogenous-growth framework to endogenize firms' allocations between transferable and embedded intangibles, allowing for both horizontal and vertical expansion. A key prediction of the model is that embedded intangibles are freely mobile across a firm's production lines; therefore, this mobility generates increasing returns to scale as the firm diversifies, which also raises entry barriers for competitors and decreases the social surplus, rather than promoting long-run growth. Thus, a shift in innovative effort ultimately sacrifices economy-wide growth for firm-level market advantages, and quantitative analysis indicates that size-dependent taxes can substantially improve welfare.

Keywords: Schumpeterian growth; step-by-step innovation; intangibles; firm dynamics; span of control (search for similar items in EconPapers)
JEL-codes: E22 O31 O32 O33 O34 (search for similar items in EconPapers)
Date: 2026-01
New Economics Papers: this item is included in nep-com and nep-sbm
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