Source: Ashish Arora et al., “Invention Value, Inventive Capability and the Large Firm Advantage,” NBER Working Paper Series, Working Paper no. 30358 (August 2022).
Commentary: A recently released National Bureau of Economic Research working paper by Ashish Arora et al. reviewed the patent activity of 2,786 public manufacturing corporations in the United States between 1980 and 2015. The authors find that larger firms’ greater returns on R&D activities is derived from their ability to capture a greater proportion of the value created by their inventions. Because of this, it is economical for large firms to broaden their R&D activities to pursue lower-quality inventions than would be the case for smaller firms. The result is that larger firms produce more inventions, but the average quality of these inventions (as measured by forward patent citations) is less than that for smaller firms.
This value-capture advantage stems from larger firm’s better commercialization capabilities. Innovation requires the production of useful inventions, but it also requires that firms can commercialize these inventions and bring them to market. This includes activities such as product development, the actual production of the good or service at scale, and marketing and sales. Consequently, the authors also find that large firms’ greater returns on their inventive activities are diminished when markets for the licensing or sale of inventions are well-formed and accessible. In this case, smaller firms are able to license or sell the rights to their inventions to larger firms that then bring them to market, and these smaller firms therefore capture more of the value created from the commercialization aspect of innovation.
This does not suggest that inventive capability does not increase with firm size. Rather, the observed negative relationship between firm size and average quality of inventions suggests that increased commercialization capabilities is simply the overriding factor. As such, the authors conclude that the gap in the return on R&D activities that exists between large and small firms is primarily a product of large firms’ greater ability to turn their inventions into products for the marketplace in an economical way.
