Sources of Innovation
A fresh perspective on the role of big companies and small
Businesspeople act; academics study. When both groups reach the same conclusions, it's time to pay attention -- particularly when they're resolving a longstanding debate affecting U.S. competitiveness.
The topic: innovation.
For decades, economists have squabbled about where most innovations originate. Large-scale corporate R&D labs or lone inventors in garages? Giant companies or small ones? Businesspeople used to behave as if they were choosing sides in the same debate. Big-company execs disdained new products that were Not Invented Here. Entrepreneurs figured the Fortune 500 wouldn't recognize an innovation if it bit them on the rump.
The reversal of that go-it-alone mentality is already a major marketplace trend. As my colleague Joel Kotkin argues elsewhere in this issue, large companies and small are setting up more and more alliances that capitalize on one another's strengths (see "Natural Partners," June 1989, [Article link]). And cooperation isn't limited to individual deals. GTE Telephone Operations, for example, is making deliberate efforts to develop new businesses in communities where the corporation has facilities. The WI/SE Partnership for Growth, an economic-development organization in the Wichita area, has undertaken several initiatives aimed at stimulating cooperation between big and smaller companies. One program will link large manufacturers' computers with those of their small suppliers, allowing electronic transmission of designs, specs, and proposals.
Such cooperative ventures may offer America its best chance to improve its innovation rate and hence its competitive position. The reason: economists are now discovering that innovations originate not just in big companies or small but in the complex interactions between them.
The evidence for this conclusion comes from data assembled a few years ago by the Small Business Administration. A team of researchers under contract to the SBA sifted through dozens of engineering and trade journals covering nearly 400 separate industries, counting up a year's worth of new-product and new-process announcements. Eliminating duplications, they listed more than 8,000 such innovations, 90% of them in manufacturing. Then they classified them, both by industry and by the size of firm that developed them.
The study produced a complex database, requiring considerable work before it would yield any conclusions. Suppose, for example, that the data showed small companies producing a lot of the plastics-products industry's 107 innovations. Fine, you might say, but how does that compare with small business's role in the industry as a whole? And how does the plastics-products industry compare with the photographic-equipment industry, say, or valves and pipe fittings? Zoltan J. Acs and David B. Audretsch, two American economists currently associated with a research center in West Berlin, have analyzed the data and published their findings in The American Economic Review.
For starters, say Acs and Audretsch, forget the simpleminded big versus small debate; there's no across-the-board rule. In aircraft, large companies introduced 31 times as many innovations as small ones. In optical instruments and lenses, they introduced half as many. All told, large companies accounted for more innovations than small ones in 21 of the 35 most innovative industries. On a per-employee basis, however, small companies as a group were more innovative. ("Small" in this context means fewer than 500 employees.)
Acs and Audretsch then asked if industries dominated by large companies -- aircraft, for instance, or autos -- tended to be more innovative than industries in which small companies predominate. Despite what you might think by comparing Detroit with Silicon Valley, the answer was yes. The real surprise, however, was where those innovations were coming from. The industries with a lot of big companies were, on average, more innovative. But it was the small companies in those industries that were more likely to produce the innovations.
Why should this be so? Acs, in an interview, pointed out that small companies in an industry such as steel may need to be highly innovative just to survive. There are other reasons as well.
Innovative entrepreneurs are often well-trained refugees from big companies in the same industry. Rod Canion of Compaq Computer spent 16 years at Texas Instruments. Wallace Leyshon, founder of Appliance Control Technology, is a veteran of Motorola (see "Made in the U.S.A.," January 1989, [Article link]). Virtually the entire semiconductor industry was built by such émigrés.
Corporate R&D labs often spawn products that a small company then brings to market. GTE Laboratories, for example, was developing a variety of computer-aided-design technologies when its corporate parent decided to get out of the business. A group of lab engineers -- with GTE's help -- then founded Silc Technologies to commercialize one of the projects they had been working on.
Big companies frequently enable a small company's inventions to become marketable innovations. Pharmaceutical and chemical giants, points out Walt Plosila of the Montgomery County (Md.) High Technology Council, have helped create the biotech industry -- by distributing grants to university researchers, by investing in fledgling companies, by contracting to do production or marketing for smaller firms. "Du Pont does nearly all the marketing and distribution for a company here called Biotech Research Laboratories, which has one of the few diagnostic kits for AIDS now on the marketplace," says Plosila.
Today, as Kotkin and others argue, there's more and more of this joint venturing -- and more and more reason to encourage it, given the United States's precarious position in the international marketplace. Maybe Acs and Audretsch's findings, along with the indisputable trend toward cooperation, will finally settle the hoary argument about whether we should look to big companies or small ones to lead us into the future. We need both.