Product Innovations by Young and Small Firms

Jose Plehn-Dujowich, May 2013

Purpose

This study investigates whether the age of a business is linked to innovation and productivity, specifically whether young firms have an edge on older firms. Previous research on innovation has shown that small businesses are more efficient at innovation than large businesses.

Background/History

Innovative productivity is closely related to the life cycles of firms: the flow from exuberant startup to mature firm. Large and older firms are expected to have an innovative advantage because of their resources (large labs, equipment, financing, experience, etc.); small and younger firms have a different kind of innovative advantage in the ease with which they may engage in unrestrained brainstorming (with no cost justification needed).

Overall Findings

The author generated patent citations per dollar of research and development stock for firms of varying sizes and ages. The results for small vs. large firms and young vs. old firms were similar. Small firms averaged 1.2626 patent citations per million dollars of R&D stock versus 0.5712 for large firms. Young firms averaged 1.2117 patent citations per million dollars of R&D stock, while old firms averaged 0.5344. Narrowing the study focus to young small firms showed them to be highly productive innovators. Firms below the median size (290 employees) and age (18 years) averaged more patent citations per million dollars of R&D stock than old large firms, 1.7535 versus 0.3424, respectively. The author created an econometric model to control for industry, to see if the results were more of a reflection of the industries the firms operated in rather than of their size and age. The results held, with both size and age having a negative effect on R&D productivity. The research also found, as expected, small manufacturing firms have a narrower product range than large firms. In 2007, small manufacturing firms averaged about 12 products while large firms averaged about 17 products. The average firm sold 13 products. Relatively young manufacturers (under about 10 years old), sell 5 to 6 products while relatively old manufacturers (about 50 years or older) sell 16 to 18 products. A more focused product range from small business could help them in innovating, as they are in a better position to understand their products and markets.