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Innovation has generally been considered essential to the prosperity of firms. The existing innovation literature does not emphasize budgeting as an important contributor to product innovation, even though it recognizes that poor budgeting may weaken the capability to innovate. However, the budgeting literature suggests that budgets can be used in different ways to improve firm performance. The purpose of this study is to investigate how the frequency of budget preparation and the interactive use of budgets are associated with product innovation and firm performance. The empirical data were collected, through a web-based survey, from CFOs and CEOs in 132 Finnish firms. The results of our partial least squares analysis indicate that the frequency of budget preparation positively affects product innovation through interactive budget use, which supports our hypothesis. Furthermore, the frequency of budget preparation and interactive budget use do have a direct positive relationship with firm performance, but one mediated by product innovation. Therefore, this study contributes to the innovation and budgeting literature by showing the frequency of budget preparation and interactive use of budgets to be two separate and important factors in product innovation. The results also show that the relationship between budgets and product innovation and performance are different in defender and prospector firms.

Interactive budgeting, product innovation, and firm performance: empirical evidence from Finnish firms