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I'm trying to model/understand the following intuition:

  1. Company makes a product
  2. Product gets sold, company makes a profit
  3. Company does something with the profit to become "better" at what they do: hire better people, improve their technology, etc
  4. Company makes a better product

Most of the theories I've come across seem to assume companies operate at a constant efficiency. How do you model company improvements (both product and process innovations) that come from profits?

The broader question I'm trying to understand is - how to you measure/correlate/predict company improvements from profitability?

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    $\begingroup$ It might be worth clarifying what you mean by “efficiency,” as part of your question sounds like you’re talking about increasing labor productivity, which is more about capital investments, or about “making a better product,” which is more related to the literature on innovation. There is some overlap, but clarity is key to getting a good answer. $\endgroup$ – dismalscience Mar 30 at 12:28
  • $\begingroup$ This is about innovation. You need to draw a distinction between product innovation (a new product, or an existing product which performs better and so can be sold at a higher price) and process innovation (making the same product more efficiently and so at a lower cost) $\endgroup$ – Henry Mar 30 at 13:37
  • $\begingroup$ Thanks, this is very helpful. Would this re-statement of the problem make sense? I'm interested to understand how given profit, how would a company spend it - disperse to shareholders, or re-invest it in the form of product or process innovation. $\endgroup$ – philee Mar 30 at 20:19

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