Business Brains

Bigger company, more innovation? Scale matters, study says

Posting in Education

New research speculates that most innovation is more likely to come from larger companies more so than from small entrepreneurial startups. Key takeaway: big companies need to be entrepreneurial, too.

Bigger is better, not badder.

In a surprising conclusion that flies in the face of conventional wisdom about entrepreneurship, Michael Mandel of the Progressive Policy Institute speculates that most of the innovation we need to drive the economy forward is more likely to come from larger companies, more so than from small entrepreneurial startups.

It simply comes down to a matter of scale, he says. Larger organizations have the resources, and can afford more failures and greater risk, than startups or small businesses. They simply can afford to innovate more.

In a recent research note, Mandel lays out his case:

"After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity."

Mandel draws upon the thinking of Harvard economist Joseph Schumpeter (inventor of the term ‘creative destruction’), who said scale was the ticket to progress. Larger companies have more money and market power to invest in and test new ideas.

Mandel lays out three reasons why he believes that larger companies are more likely to be hotbeds of innovation that their smaller counterparts:

Economic and job growth today are increasingly driven by large-scale innovation ecosystems. For example, the ecosystems necessary to make the iPhone, Android, and 4G mobile networks a market success "require management by a core company or companies with the resources and scale to provide leadership and technological direction. This task typically cannot be handled by a small company or startup."

Globalization puts more of a premium on size than ever before. "A company that looks large in the context of the domestic economy may be relatively small in the context of the global economy. In order to capture the fruits of innovation, U.S. companies have to have the resources to stand against foreign competition, much of which may be state supported.

Only large-scale enterprises have the resources to address challenges in reforming large-scale integrated systems such as health, energy, and education. "Conventional venture-backed startups don’t have the resources to tackle these mammoth problems. Only large firms have the staying power and the scale to potentially implement systemic innovations in these industries."

Mandel cites data from the National Science Foundation that found that big companies—those employing more 5,000 workers in the U.S.—spent an average of $3,368 per worker on R&D. Small companies—those employing from 5 to 99 workers in the U.S.—spent an average of $793 per worker on R&D, less than a quarter as much.

The NSF also asked companies whether they had any product and process innovations in the three-year period 2006-2008. Not surprisingly, it turns out that companies with higher levels of R&D are more likely to report substantially higher levels of innovations.

Mandel also observes that the super fast-growing companies -- such as hot startups out of Silicon Valley -- can not be categorized as small companies for long, as they quickly begin to scale into larger enterprises.

This all makes perfect sense, and validates the point that entrepreneurship isn't -- and shouldn't be -- exclusive to small companies and start-ups. Large organizations, too, can have their share of entrepreneurs. In fact, large organizations need to do all they can to foster entrepreneurial spirit within their ranks. Being large in and of itself doesn't make for a culture of innovation -- it can be stifling. And being large and having a great deal of innovation doesn't lead to market success -- just ask the folks at Kodak.

What is needed is an entrepreneurial culture that allows for failure, rewards innovation, and quickly brings that innovation to the economy at large.  The question is, how many large organizations really have that kind of culture?

(Photo by the author.)

Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure