Product Innovation, Product Diversification, and Firm Growth: Evidence from Japan’s Early Industrialization

We explore how firms grow by adding products. leverage detailed data from Japan’s cotton spinning industry at the turn of last century to do so. This setting allows us fully characterize type differentiation (vertical or horizontal) new product introductions as well whether is within outside firm’s prior technological capabilities. find that trying introduce innovative products beyond previous technologically feasible set, even if such trials fail, a key firm growth. Indeed, it mostly facilitates growth through later success in horizontal diversification. In long-term outcomes, right tail size distribution becomes dominated first moved into challenging and then applied their newly acquired technical competence expansion portfolios. Two mechanisms which this knowledge transfer occurs are greater production system flexibility higher appeal downstream buyers. (JEL D22, L11,L67, N65, N85, O31, O33)