Innovation and small firms. - book reviews

Business Economics, Jan, 1992 by Max M. Schreiber

THE PERCEPTION that invention and innovation are merely the purview of the large corporation has taken strong root in American business history. The authors set out to change this view by quantifying the effects of technical contributions made recently by smaller firms and by examining the changing market structures where technological change is imminent and/or diffused throughout the industry.

The authors first establish the credentials of several new data sets (the Small Business Data Base and the Small Business Innovations Data Base). Instead of having to rely on input measures such as R & D investment and patents data, investigators now have at their disposal an output measure, the actual number of innovations. The second source offers a myriad of data describing the economic and financial aspects for small firms. Noting the comparability of the new data banks with the more traditional sources, Acs and Audretsch offer the SBDB and the SBIDB as more reliable and pertinent for studying the role of innovation and firm size.

In Chapter 3, the authors attempt to isolate the determinants of innovative activity. After a survey of recent findings regarding market structure and innovation, a regression model is proposed to test hypotheses concerning the extent of the influence of market structure and firm size. Where previous studies found little support for the relationship between market concentration and technical change, the authors find convincing evidence that the pace of innovative change decreases as concentration increases.

Their results lend support to Winter's two-tier technological regimes. One, the routinized regime, is characterized by considerable capital intensity, concentration, high unionization of labor and the production of differentiated products. These conditions are more representative of large firms. The second one, the entrepreneurial regime, relies more on the use of highly skilled labor and is argued to be conducive to small firm activity. Finding these regimes to be divergent, Acs and Audretsch suggest that any policy consider the different incentives driving large and small firms towards innovative changes.

Recognizing that technological change also affects market structure, Acs and Audretsch address the presence of small firms in manufacturing industries. Small firms appear to be viable in environments where R & D, capital intensity and advertising play lesser roles. Having identified these obstacles, the authors turn their attention to conditions that affect the entry of firms. Most studies have centered on large firm entry and have assumed similar strategies for entry by small as well as large entities. Using a new measure termed "births" (the number of employees in entering firms), the authors find some curious results (by their own admission) in Chapter 5. Even though capital-intensive industries are not very receptive to small firms, small firms are not deterred from entering such environments. Also puzzling is the finding that the pace of combined (large and small) innovative activity serves to inhibit entry. Unfortunately, the extent to which this uncertainty hinders entry is not explored. Rather, the authors fall back on Winter's regimes and argue that effective innovation tactics will decide the viability of the firms in their respective industries.

Some specific tactics and innovations introduced across the decade of the 1970s are investigated next. In Chapter 6, flexible technology and size distribution of engineering firms are considered. In industries where robots and numerically controlled devices were employed, a shift in size distribution toward smaller firms and plants is observed. The analysis also points to a smaller average establishment size and an increase in the market share of sales for smaller firms. "These results support the long-standing view in industrial organization that the size distribution of firms can be affected, in either direction, by technological change." (pp. 148-149)

The most intriguing contribution of this work is presented in Chapter 7 where intra-industry dynamics are examined. Here, two questions are entertained: Are the growth rates of large firms and small firms identical? What determines the extent of turbulence in an industry? Recent studies report that small firms have growth rates that exceed those of large firms. Acs and Audretsch, however, find that, when "exit" employment is included in the growth measures, for about two-thirds of the 247 industries small firms experienced growth rates similar to large firms from the mid-1970s to the mid-1980s. Thus, while surviving small firms might sustain higher growth rates, there is also a greater tendency for small firms to shut down.

The second question considers the relative extent of employment changes within an industry as well as entry and exit from operation. The term "turbulence" is used to limit semantic difficulties with such terms as "mobility" and "turnover." The combined (large and small firms) pace of innovative activity hinders shifts in employment within industries; and Acs and Audretsch find that this turbulence encourages small firms to innovative. The authors take this to mean that fewer firms will enter when the successful and experienced firms have a distinct advantage in the innovative process, i.e., when turbulence is low. But, when "fringe" firms possess substantial skills and knowledge, outside firms are likely to enter.