Large Firms Actually Are Good At Innovation, Too

It’s become standard fare to believe that small firms innovate and large firms copy. Studies that support this view argue that small firms benefit from a number of factors, such as employees’ close proximity to one another, which fosters easier problem-solving; less red tape, which allows faster decision-making; and higher responsiveness to customer input.

But new research suggests it is not that simple. Business professors Anne Marie Knott and Carl Vieregger, in their recent paper “Reconciling the Firm Size and Innovation Puzzle,” explain how previous studies got the data wrong. Historically, innovation scholars have relied on product or patent counts as a proxy to measure innovation output. But doing so overemphasizes product innovation and underestimates process or incremental innovation—innovation activities that large firms engage in more but rarely involve a patent filing. But the recent development of the National Science Foundation’s Business Research and Development and Innovation Survey (BRDIS) allowed Knott and Vieregger to better analyze incremental and process innovation. Survey enhancements included questions on firm R&D strategy and the outcomes of specific R&D decisions. Product innovation refers to an entirely new product; incremental innovation refers to small improvements that, taken as a whole, make a product much better; and process innovation refers to techniques that make the production process much more efficient.

Using NSF R&D data between 2008 and 2011, Knott and Vieregger estimate that a 10 percent increase in the number of employees increases R&D by 7.2 percent, and that a 10 percent increase in firm revenues increases R&D productivity by 0.14 percent. Their conclusions show large firms invest more in R&D activities and enjoy higher returns on innovation output per dollar invested in R&D. Knott and Vieregger also find that incremental innovation increases as firms grow larger, while radical innovation decreases. Therefore, compared to small firms, large firms have a greater ability to absorb riskier innovation investments by spreading that risk over a wider portfolio of innovative products.