Sources of Unequal in Nov

Research Policy 27 1998.
725745
Small and large firms: sources of unequal innovations?

B.S. Tether
) ESRC Centre for Research on Innoation and Competition (CRIC), The Uniersity of Manchester and UMIST, Precinct Centre, Oxford Road, Manchester, M13 9QH, UK Accepted 9 July 1998
Abstract In recent years a number of studies based on innovation counts have found that small firms have introduced more innovations per thousand employees than their larger counterparts. This has been widely interpreted as indicating that small firms are more innovative than large firms, or that small firms are more efficient innovators than large firms. Such an interpretation, however, depends on the important assumption that, on average, the value of the innovations introduced did not increase systematically with the size of the innovating firms. This paper serves two purposes. First, it highlights this important assumption. Second, through a database of significant innovations introduced in the UK during the 1980s, it examines its validity. The analysis throws into doubt the widely held conclusion that small firms are more innovative, or more efficient innovators, than large firms. q 1998 Elsevier Science B.V. All rights reserved.
1. Introduction The question of how firm-size relates to the ability and propensity to innovate is one of the oldest in political economy Harrison, 1994.. Inspired by contrasting hypotheses of Schumpeter 1934, 1942., this question has been widely but inconclusively examined, giving rise to the second largest body of empirical literature in the field of industrial organisation Cohen, 1995.. The existence of such a large literature is indicative of both the importance of the question and the inconclusive nature of the results. The inconclusive nature of the results reflects both the difficulties of measuring innovative activity and of interpreting analytical results based on imperfect measures OECD, 1992.. Interpretation is especially
difficult because the different indicators R and D expenditures, R and D employment, patents, innovation counts. suggest different relationships between firm-size and technologicalrinnovative activity Cohen, 1995.. This paper concerns the interpretation of the results of studies based on object-based Archibugi, 1988. data-sets of innovative outputs in so far as they relate to the debate on firm-size and innovation. 1 In recent years, such studies have tended to find that small firms have introduced a
Tel.: q44-0-161-275-7376; E-mail: bruce.tether@man.ac.uk
1 There are two traditions of research based on the identification of innovative outputs. The first is the object-based approach which begins by identifying the innovations themselves. The second is the subject-based approach Archibugi, 1988. which begins by identifying firms and asking them about their innovative activities. This paper is only concerned with the results which have arisen from analyses based on the object-based approach.
0048-7333r98r$19.00 q 1998 Elsevier Science B.V. All rights reserved. PII: S 0 0 4 8 - 7 3 3 3 9 8 . 0 0 0 7 9 - 1
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B.S. Tetherr Research Policy 27 (1998) 725745
larger proportion of the innovations than their other contributions to the economy, such as R and D activities, would imply. Analysts have tended to standardise the innovativeness of different size categories of firms by their employment. Acs and Audretsch 1990, 1993. assert: Probably, the best measure of innovative activity is the total innovation rate, which is defined as the total number of innovations per 1000 employees Acs and Audretsch, 1993, pp. 2021.. Pavitt et al. 1987. used a similar measure, the ratio of a firm-size classifications share of innovations to its share of employment. The finding that small firms have introduced a proportion of innovations larger than their share of employment has frequently been interpreted as showing that small firms are more innovative than large firms, or more efficient innovators, achieving greater outputs per unit of formal. R and D input Acs and Audretsch, 1990; Kleinknecht et al., 1993; Rothwell and Dodgson, 1994; Cohen, 1995.. This interpretation, however, depends on the crucial but normally unstated assumption that the economic value of the innovations introduced is unrelated to the size of the firms responsible for their introduction. The purpose of this paper is to highlight this assumption and to question its validity. The latter is achieved through the analysis of a data-set of innovations introduced in the UK during the 1980s. The analysis broadly complements the findings of Cohen and Klepper 1996., who introduced the idea of cost-spreading to the debate on firm-size and R and D expenditures. Cohen and Klepper 1996. thereby challenged the interpretation that small firm are more efficient innovators than large firms. The paper takes the following structure. Section 2 provides a brief review of the existing research findings, drawn from object-based data-sets of innovations, as these concern the relationship between firm-size and innovation. Section 3 highlights how these results have been interpreted and the scope for misinterpretation. The investigation into the assumption of equal values which is at the heart of the paper begins in Section 4, whilst the analysis is undertaken in Sections 5 and 6. Section 7 then illustrates how the distribution of innovation by firm-size changes when the assumption of equal values is removed and replaced by systems of weighted values. Lastly, some conclusions are pro-
vided in Section 8, which also considers the extent to which the analytical findings can be generalised more widely.
2. Existing object-based research on innovative outputs by firm-size Dissatisfaction with R and D activities and patents as measures of technological change has spurred the development and investigation of direct measures of innovative activity which focus on innovative outputs. Like patenting and R and D studies, these innovation count studies have tended to focus on the manufacturing sector, but they have also tended to be biased towards product as opposed to process innovation. 2 It is stressed, therefore, that the discussion in this paper relates primarily to product innovation in the manufacturing sector. Object-based innovation count studies Archibugi, 1988. have been carried out in many countries OECD, 1990., and this section provides a brief review of the headline findings, as they relate to the firm-size and innovation debate, of some of these studies. The interpretation of the results will then be highlighted, as will the scope for misinterpretation. 2.1. The SPRU innoations database The SPRU innovations database lists 4378 significant technological innovations introduced to the United Kingdom between 1945 and 1983. Pavitt et al. 1987. used the database, which was established for the purpose of investigating the contribution of small firms to innovation Bolton Committee, 1971., to assess the size distribution of innovating firms in the UK. Pavitt et al. found that the share of innovations introduced by the largest manufacturing enterprises was consistently above their share of manufacturing employment for the whole of the period of analysis 19451983., but the role of small and medium-sized enterprises those with fewer than 500 employeesSMEs. appeared to evolve over time.
2 Here, product innovation refers to an innovation which is sold by one firm to at least one other firm, whereas a process innovation is one developed for use within the firm.
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Until the early 1970s the share of innovations introduced by SMEs was less than their share of employment, but in the late 1970s and early 1980s SMEs introduced a share of the innovations larger than their share of employment. Consequently, it appeared that in the late 1970s and early 1980s SMEs were, like the largest enterprises, a disproportionately important source of innovation. During this period it was the enterprises in the intermediate size categories large but not giant enterprisesthose with between 500 and 10,000 employees. which were found to have introduced a smaller proportion of the innovations than their share of employment. Pavitt et al. concluded from this that: The relationship between innovative activity and firm-size may well be increasingly u-shaped, rather than r-shaped Pavitt et al., 1987, p. 313. as had been supposed from evidence of R and D expenditures. 3 2.2. Acs and Audretschs study of US innoation using the SBA database Another major study which used an object-based indicator of innovative activity and which identified SMEs as a disproportionately important source of innovation was the US study by Acs and Audretsch Edwards and Gordon, 1984; Acs and Audretsch, 1990, 1993... 4 Acs and Audretsch used the US Small Business Administrations SBA. data-set of 8074 innovations introduced in the US in 1982. They found that, in the manufacturing sector, SMEs had an innovation rate i.e., the number of innovations per thousand employees. of 0.309, which was con-
siderably higher than the rate achieved by large enterprises those with 500 q employees.: 0.202. 2.3. European trade literature based studies on innoation Recently, a number of studies have been undertaken in European countries using a common methodology for identifying innovations reported in the trade literature Cogan, 1993; Kleinknecht et al., 1993; Coombs et al., 1996; Santarelli and Piergiovanni, 1996.. Three of these studies include analyses of innovative intensities by firm-size and all three found that small firms introduced a greater share of the innovations than that expected by their share of employment. 5 For the Netherlands, Kleinknecht et al. 1993. found that small manufacturing and service firms with between 20 and 49 employees had introduced for 0.79 innovations per thousand employees compared with 0.19 innovations per thousand employees for the largest category of firms, those with over 500 employees. For Italy, Santarelli and Piergiovanni 1996. found that, across all manufacturing industries, small firmswith fewer than 200 employeeshad introduced 13.2 innovations per thousand employees whereas large firms with 200 or more employees had introduced only 0.7 innovations per thousand employees. For Ireland, Cogan 1993. found small manufacturing firms with less than five employees had introduced 1.02 innovations per thousand employees compared with 0.03 innovations per thousand employees from large firms with over 500 employees. 2.4. Summary of the eidence arising from the existing research Table 1 summarises the headline findings on firm-size and innovative intensities from the studies
Recently the evidence provided by the last years of the SPRU database 19751983. has been re-examined by Tether et al. 1997.. That analysis found that, contrary to the above, SMEs did not emerge as a disproportionately important source of innovation in the last years of the database. Instead, and as in the previous periods according to Pavitt et al.s analysis, only the largest enterprises were a disproportionately important source of innovation relative to employment. Tether et al. 1997. concluded that the evidence of the last years of the SPRU database suggests the relationship between enterprise size and innovative intensity was j-shaped, rather than u-shaped, as Pavitt et al. had suggested. 4 See Gellman Research Associates 1976, 1982. for other US studies.
5 Coombs et al. did not report innovation intensities in this way. They did, however, show that the number of innovations introduced per firm was higher amongst small firms 1.38for firms with fewer than 200 employees. than amongst large firms 1.098 for firms with over 1000 employees..
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Table 1 Innovative intensities of small and large firms: the results from five studiesa Country and years. UK 19791983. US 1982. US 1982. Netherlands 1989. Italy 1989. Ireland 1991.
a
Coverage and definition of small firms b Manufacturing; small employ less than 500 Manufacturing; small employ less than 500 Manufacturing and services; small employ less than 500 Manufacturing and services; small employ 10499 Manufacturing; small employ less than 200 Manufacturing; small employ less than 20
Authors Pavitt et al. 1987. c Acs and Audretsch 1990. Acs and Audretsch 1990. Kleinknecht et al. 1993. Santarelli and Piergiovanni 1996. Cogan 1993. d
SFIRrLFIR 1.31 1.55 2.38 2.68 18.86 2.67
These studies are not directly comparable because of different methodologies and definitions of small firms. SFIR: small firm innovation ratei.e., innovations per thousand employees. LFIR: large firm innovation ratei.e., innovations per thousand employees. b Large firms are those with more than the threshold number of employees defining small firms. c In Tether et al.s 1997. reappraisal of the SPRU database, this falls to between 1.04 and 1.15 and the innovative intensity of small firms was not found to be significantly greater than that of large firms during this period. A range of values is provided in the Tether et al. study because of the uncertainty about how to classify a small proportion of the firms on the SPRU Database. d In Ireland, there are very few manufacturing firms with over 500 employees, so the size threshold for Ireland is 20 employees.
discussed above. Although some of the studies Pavitt et al., 1987; Acs and Audretsch, 1990; Santarelli and Piergiovanni, 1996. have reported differences between industries in the innovative intensities of small and large firms, it is the headline findings across all industries that concern us. Dividing the Small Firm Innovation Rate SFIR. by the Large Firm Innovation Rate LFIR. consistently provides values greater than one, which shows that all of these studies found the innovative intensity of small firms to be greater than that of large firms.
innovativeness of different sizes of firms from innovation count studies. The first concerns the sampling methodology, whilst the second and third concern the technological and economic significance of the innovations in the analysis. 3.1. Possible misrepresentations due to the method of selection In compiling a data-set of innovations, the selection of innovations clearly depends on the definition of innovation used and the practical methodology employed to implement it. Defining innovation is problematic, but the concern of this section is the practical methodology used to select the innovations. Clearly, if the methodology were biased, especially in favour of small firms, then the headline conclusionthat small firms are more innovative than large firmswould not be reliable. Object-based innovation count studies have relied on the identification of significant innovations in the historical literature, or by experts Pavitt et al., 1987., or they have used the trade literature to identify a wider set of innovations Acs and Audretsch, 1990; Cogan, 1993; Kleinknecht et al., 1993; Coombs et al., 1996; Santarelli and Piergiovanni, 1996.. These methodologies have resulted in data-sets dominated by product as opposed to process innovations. As it is thought that large firms are the primary source of process innovations, this suggests a bias against large firms. On the other hand, there
3. Interpreting (and misinterpreting) these findings In general, innovation count studies have found that smaller firms have introduced more innovations per thousand employees than large firms Table 1.. This has been widely interpreted as showing that smaller firms are more innovative than larger firms Acs and Audretsch, 1990; Rothwell and Dodgson, 1994; Cohen, 1995.. 6 There are, however, at least three problems with drawing conclusions about the
6 This is a particularly significant interpretation of the result because the established orthodoxy, based primarily on analyses of the distribution of formal. R and D expenditures, suggests that large firms are the primary source of technologicalrinnovative activity Cohen, 1995..
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may be a counter bias in favour of larger firms because it is probable that large firms are more likely to have their product innovations recognised than small firms Acs and Audretsch, 1990.. Although these biases may be off-setting, the extent of any residual bias is unknown, and it is assumed that the selection methodology is fair with respect to the size of the innovating firms. This assumption is retained in the analyses presented in this paper. 3.2. Equialence in the technological significance of the innoations The second potential problem, which is widely appreciated, is due to the fact that innovations are known to vary enormously in their technological significance Sahal, 1983.. This is a potential problem because if a systematic variation were found between firm-sizes in the significance of the innovations introduced, then an unweighted analysis based on the innovation rates of small and large firms would be misleading. To tackle this problem, researchers have devised various categorisations of innovations according to their technological significance. Kleinknecht et al.s 1993. dual categorisation of innovations by their novelty and complexity is probably the most sophisticated classification scheme to date. Perhaps surprisingly, none of the studies discussed in this paper has found statistically significant evidence, based on these qualitative categorisations, to suggest that the technological significance of the innovations in the data-sets varied with the size of the firms responsible for their introduction. It has, therefore, generally been assumed that no significant variation exists by firm-size in the quality of the innovations introduced. Consequently, the number of innovations introduced per thousand employees is considered to be a reasonable indicator of the innovativeness of different size categories of firms, and a fair basis by which to compare the innovative performance of small and large firms. 3.3. Equialence in the economic significance of the innoations The third potential problem concerns the economic or commercial significance of the innovations
and whether this varies systematically with firm-size. Again, this is a potential problem, similar to the last, in that if a systematic relationship were found between the size of the innovating firm and the value of the innovations, then an unweighted comparison of the innovation rates of small and large firms would be misleading. If, alternatively, the average value of the innovations was found to be unrelated to the size of the innovating firm, then the innovation rate would again be an unbiased indicator. In contrast to the question of technological significance, the question of whether or not the economic significance of the innovations introduced varies systematically with the size of the innovating firm has not been addressed in any of the studies discussed in this paper. The existing studies all therefore contain the important and usually implicit. assumption that, on average, the economic or commercial value of the innovations did not vary systematically with the size of the firms responsible for their introduction. 7 This assumption has generally been employed because the researchers have had no means by which to assess the economic significance of the individual innovations. 8 The remainder of this paper is concerned with investigating this equal values assumption, and assessing the implications if it is found to be invalid.
4. Investigating the assumption of equal values This section introduces the investigation into the equal values assumption which will use evidence from a data-set of 443 innovations introduced by manufacturing sector companies in the UK between 1977 and 1990 Tether, 1996.. The data-set was
Santarelli and Piergiovanni 1996. assume explicitly that because the technological significance of the innovations does not vary significantly with the size of the innovating firms, this is also true of the economic significance of the innovations. The other studies also make this assumption, but implicitly. 8 This in turn relates to the practical difficulties of gathering data on the value of innovations, for even the simplest measure of economic impact, the direct commercial value to the innovator through product sales or production efficiencies, can be difficult to obtain Wallmark and McQueen, 1991..
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compiled from the set of innovations which won the Queens Award for Technological Achievement, the British Design Award, or both, between 1980 and 1990. 9 In compiling the data-set, information was gathered through a postal survey, telephone enquiries and secondary sources. on the innovations themselves and on the firms responsible for their introduction Tether, 1996.. Sales data relating directly to the innovations were compiled for only a small number of the innovations, but the information on the firms included their size, in employment and sales, at the time of the introduction of their innovation and, in terms of sales, in the period after its introduction. 10 The analysis is presented in Sections 5 and 6. Section 5 assesses the limited direct evidence on the question of equal values by drawing on the sales data compiled for the small sub-set of the innovations for which Queens Award application forms were received, while Section 6 assesses the indirect evidence based on the post-innovative performance of all the innovating companies. First, however, this section introduces the logic underlying the analysis and the necessary assumptions. 4.1. Introducing the logic of the analysis and the underlying assumptions It should first be recognised that attempting to place an economic or commercial value on an inno-
The 443 innovations used in the analysis is a sub-set of the 508 innovations recognised by these awards between 1980 and 1990. Sixty-five innovations have been excluded from this analysis because they were introduced before 1977 andror were developed by service sector or non-commercial organisations. Both awards were applied for, the applications were then scrutinised by experts and with both schemes less than 10% of the applicants received the award. 10 In addition to being asked to respond to the questionnaire survey, the innovating companies were asked to provide a copy of the form completed when applying for these awards. Twenty-three Queens Award applications forms were received which were useful to this analysis because they contain detailed sales figures relating directly to the innovations. Some Design Award application forms were also received, but these do not contain detailed sales figures relating specifically to the innovations. The sales values of a few more innovations were derived from the annual reports of the innovating firms.
vation is not simple. For an innovation can be said to have both a direct and an indirect value. The direct value is that which its users and producers derive directly from its production and use. The indirect value is found in its effects upon the production and use ofand consequently direct values ofsubstitute and complementary goods and services. Although conceptually simple, this presents tremendous problems of allocation, for, to avoid double counting, the direct value of an innovation should ideally be net of the indirect value assigned to any pre-existing innovations which are deemed to have facilitated its introduction. For practical reasons, only the gross. direct value of the innovations on the data-set will be considered in this paper. As will be shown shortly, even the direct value is difficult to measure. It is however appreciated that, conceptually at least, the indirect value of an innovation may be positive or negative, that its absolute magnitude may be greater or less than its direct value and, consequently, that there may be no general relationship between the direct value of an innovation and its total value which combines its direct and indirect values. From the direct values perspective, consider that if Vi is the total direct value of the innovation i over all time T, and qi0 is the size of the innovating firm i just prior to innovation, when t s 0 t s 1 for the period of introduction., then, if the assumption of equal values holds, the mean value of Vi is statistically unrelated to qi0 . 11 The first analytical problem is that Vi is complex, being the sum of the innovations value to the innovator its private value., Vi I , its spillover or public. value to imitators, Vi S , and Vi C , its surplus value to consumers i.e., the consumers surplus.. Thus, Vi s Vi I q Vi S q Vi C . Whilst it is difficult in practice to measure an innovations private value, it is very much harder and often impossible to measure its spillover value to imitators or the consumers surplus. For this reason, only the private value of the innovations will be considered directly in this paper. Ideally, the private value of an innovation should be measured in terms of its value added, but such
Throughout the analysis, the index i will be used to refer to both the innovation and the innovating firm.
11
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information is very difficult to obtain, especially for a large number of innovations. Wallmark and McQueen 1991. argue that profits would represent a better measure of an innovations value than sales, but information about profits is notoriously difficult to obtain or calculate in an objective way. Consequently, in assessing the value of innovations, Wallmark and McQueen 1991. use sales, which they regard as a reasonably objective measure. For the same reasons, sales are used as the proxy measure of an innovations private value in the analysis which follows. As the analysis concerns whether or not the direct value of the innovations is related to the size of the innovating firm, the first important assumption is that any relationship that exists between the true private value of the innovationswhich should be expressed in value addedand their sales value is independent of the size of the innovating firms at the time of innovation. Consider also that if Vi is the total direct value of the innovation i over all time T, the direct value of the innovation i in the individual time period t, is i t , which is itself the sum of the innovations private, spillover and consumers surplus values within that period. Thus, Vi s ST i t , where i t s iIt q iSt ts1 q iC . This highlights the second analytical problem, t which is that the direct value of an innovation is distributed over time, but the length, distribution and composition in terms of the proportions of private, public and consumer surplus values. of the returns can vary considerably between individual innovations. A second assumption is required to deal with this problem, which is that on average the proportion of the total direct value of the innovation included in the analysis does not vary systematically with the size of the innovating firm. As the exact form of this assumption is different in the two analytical sections, ) its precise formulation as piI in Section 5 and PiI in Section 6. will be made clear below.
sis in this section can be considered to be preliminary to the main analysis, based largely on indirect evidence, which is presented in Section 6. This section does however help to introduce the ideas which underlie that analysis. The Queens Award application form required up to 3 years of sales data for each innovation seeking the award. The sales data for the individual innovations were standardised by first selecting the sales for the year amongst those on each form which reported the largest sales of the innovation. 12 The sales for these years, which individually related to a variety of years in the mid-to-late 1980s, were then standardised by the index of manufacturing output prices IMF, 1996. to a value in pounds sterling in 1991 terms denoted 91 .. The standardised sales value of the innovation i to the innovator in the ) selected year, t, was then denoted iI). t 5.1. Variation in alue by firm-size a first indication Table 2 shows the wide variation in the value of the innovations to the innovator and in the selected year. discovered by this process. One innovation, the computer system, clearly dominates. Yet, while this variation is illuminating, it is not unexpected. Nor, from the point of view of the assumption of equal values, is it important, unless the average value of the innovations is found to vary systematically with the size of the innovating firm. Table 2 also categorises the innovations by the size, just prior to the introduction of the innovation, of the innovating firms. This is actually done for two definitions of the firm; the company and the enterprise. In this context, the company is the unit directly responsible for the innovation, whilst the enterprise is the total group of companies to which the innovating company belonged at the time of innovation. If an enterprise is composed of a single unit, it is also the company. In the table,
5. The direct evidencefrom the Queens Award application forms This section draws on the sales data which were compiled for the 23 innovations for which the Queens Award application forms were received. This constitutes only a small sample, and the analyThe year with the highest sales was chosen because in some cases there were only 2 years of data, whilst in others the first 2 years were clearly the first 2 years of sales in which the innovation had not yet fully penetrated the market.
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Table 2 Unequal innovations and the size of the innovator Innovation A computer system A. A drug A microprocessor Aircraft instrumentation Medical equipment Electric motors An animal foodstuff Radio pager Laser systems Metrology instrumentation A chemicals process Medical instrumentation Aero-engines technology Ticket encoding A metal casting process A rolling oil Radar systems An offshore support system Food processing equipment Splicer machine Ceramics activity 1 Communications system Ceramics activity 2 Z. Sales 91 thousands. 356,448 60,049 52,457 35,618 28,733 14,673 9889 9112 6290 5515 4307 4145 3398 3291 3166 2690 2514 1300 1052 968 502 486 83 Percentage of the total 58.75 9.90 8.65 5.87 4.74 2.42 1.63 1.50 1.04 0.91 0.71 0.68 0.56 0.54 0.52 0.44 0.41 0.21 0.17 0.16 0.08 0.08 0.01 Size of the innovating company Large Large Large Large Small Large Large Large Small Small Large Small Large Large Small Small Small Small Small Small Small Small Small Size of the innovating enterprise Large Large Large Large Small Large Large Large Large Small Large Large Large Large Small Large Large Large Large Small Small Small Small
Small companies and enterprises are those with fewer than 500 employees. Large companies or enterprises are those with 500 or more employees. A company is the unit directly responsible for the innovation. The enterprise is the total group of companies to which the innovating company belonged at the time of innovation. A. and Z. denote the highest and lowest value innovations, respectively.
small companies or enterprises are those with fewer than 500 employees, whilst large companies or enterprises are those with 500 or more employees in the period just prior to the introduction of their innovations. It is apparent from Table 2 that large companies and enterprises were responsible for almost all of the higher value innovations, whilst most of the lower value innovations were introduced by small companies although not necessarily small enterprises.. Table 3 compares the mean values of the innovations introduced and shows that, even if the highest and lowest value innovations are excluded, the mean value of the innovations introduced by large companies was four times that of those introduced by small companies. 13 The difference was less at the
enterprise level, but the mean value of the innovations introduced by large enterprises was still twice that of those introduced by small enterprises. 5.2. Regression analysis Table 3 provides the first indication that the value of the innovations introduced increased with the size of the innovating firm. Estimating the regression: ln iI)s b 0 q b 1 ln qi0 . q i provides a more formal t analysis of the relationship, where qi0 is the pre-innovation sales turnover of the innovator i expressed in 91 .. The estimated value of the co-efficient b 1 provides a test of the assumption that the value of ) the innovations to their innovators and in the year t . did not vary systematically with the size of the innovating firm such that the null hypothesis is H 0 : b 1 s 0.. The analysis was undertaken at both the company and enterprise levels, and also with and without the two most extreme innovations by value
Because these may have been exceptionally high and low value innovations, respectively.
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B.S. Tetherr Research Policy 27 (1998) 725745 Table 3 Summary statistics calculated from Table 2 Mean of small Companies all innovations. Companies excluding A and Z. Enterprises all innovations. Enterprises excluding A and Z. 91 4419 91 4740 91 5636 91 6481 Mean of large 91 54,924 91 21,422 91 35,452 9114,052 Ratio of means: smallrlarge 0.08 0.22 0.16 0.46
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See Table 2 for the identity of innovations A and Z and for the definitions of small, large, company and enterprise.
Table 4 Results of the estimation of the regression: ln iI)s b 0 q b 1 ln qi0 . q i t Company level all 23 innovations. Company level excluding A and Z. 6.20 9.51))). 0.349 3.75))). 21 14.08))) 0.395
)
Enterprise level all 23 innovations. 5.85 6.16))). 0.320 2.97))). 23 8.82))) 0.262
Enterprise level excluding A and Z. 6.44 8.65))). 0.245 2.92))). 21 8.55))) 0.274
b0 b1 N F R2
5.53 6.58))). 0.446 3.77))). 23 14.23))) 0.375
Here, iI) is the sales of the innovation i in the year t, and qi0 is the sales of company i in the year before the introduction of the innovation t t s 0.. t-ratios in parentheses. )))Indicates significance at 1%.
in the analysis i.e., A and Z in Table 2.. The results are provided in Table 4. The estimations all indicate, at both the company and enterprise levels, and whether or not the two most extreme innovations by value were included in the analysis, that the co-efficient b 1 is greater than zero but less than one i.e., 0 - b 1 - 1.. This not only requires that the null hypothesis H 0 : b 1 s 0. be rejected, but shows that, on average, the ) sales value of the innovations in the year t increased systematically b 1 ) 0., but less than proportionately b 1 - 1., with the size of the innovating firm. Thus, in general, the value of these innovations increasedless than proportionatelywith the size of the innovating firms. However, it is important to appreciate two limitations of this analysis. The first is due to the small number of observations 21 or 23.. Which is inadequate for robust regression analysis. The second is that generalising from this analysis would require an assumption about the relationship between the known. value of the innovations to the ) innovator in the single year t, iI), and the unknown. t total direct value of the innovations, Vi . This assumption is that the ratio between the known value iI) and t the unknown value Vi does not vary systematically
with the size of the innovating firm at t s 0. This ) ratio can be expressed as the variable piI where I) i t )I pi s . Unfortunately, this is a highly questionable Vi ) assumption because iI) and, consequently, piI are t likely to be highly variable, a problem exacerbated by the small number of observations in the analysis. 14 Nevertheless, this section has provided the first indication that the value of the innovations may have increased systematically with the size of the innovating firms.
6. The indirect evidencethe post-innovation performance of the firms Section 5 provided almost all of the available evidence which relates directly to the value of the
14 Parameter iI) is likely to vary with, amongst other things, the t length of the innovations life cycle and the broader economic context boom or recession. during which the observation was made. Because of the low number of observations, it was not possible to control for such factors.
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innovations. This section, by contrast, draws mainly on wider indirect evidence which indicates the value of the innovations. The analysis in this section is conducted over a fixed number of years between the introduction of the innovations when t s 1. and t, where, in the analysis, t is four and six. This period is denoted T, so Vi I is the value of the innovation i t to the innovator in the period T where Vi I s S ts1iIt .. I The relationship between the value Vi and the total direct value of the innovation Vi can be ex Vi I pressed as PiI s , and the important assumption Vi in this section is that PiI does not vary systematically with the size of the innovating firm at time t s 0 i.e., just prior to the introduction of the innovation.. Because PiI is based on a several years, it is less ) volatile than piI. Moreover, as this analysis contains all of the firms, the PiI assumption is more robust ) than the piI assumption employed in Section 5. In this section, the analysis is undertaken at the company and not at the enterprise level. This reflects the fact that it is both easier and more appropriate to investigate the impact of the innovations at this level. Data were therefore gathered, for as many companies as possible, on company sales in the year prior to the introduction of the innovation t s 0., the year of innovation t s 1. and the period following innovation t ) 1.. Because these data related to a variety of years from the late 1970s to the late 1980s, the sales values for each year were standardised by the index of manufacturing output prices IMF, 1996. to values in pounds sterling in 1991 terms denoted 91 .. The analysis in this section begins by attempting to estimate the mean value of the innovations introduced by the companies that were very small VSCs. having fewer than 50 employeesjust prior to the introduction of their innovations i.e., at t s 0.. Of the 443 innovations in the data-set, 107 were introduced by such companies. If, as the assumption of equal values suggests, the mean value of the innovations did not vary with the size of the innovating firm, then the mean value of the innovations introduced by the VSCs should also be appropriate for the innovations introduced by other categories of companies, including the very large innovators VLCs. those with 1000 or more employees at t s 0.
6.1. Estimating the alue of the innoations introduced by the ery small companies Because of the absence of data, it was not possi ble to find the mean value of Vi I directly, so it could only be estimated. This was done in three ways. The first was through the mean cumulated output Q VSC of the very small companies, VSCs, in the T period, where, for the individual firm i and over the t period T, Q i s S ts1 qi t . In any individual year t, the output of the innovating firm i, qi t , can be considered to be the sum of its sales of the innovation, iIt , and its other sales, oi t thus qi t s iIt q oi t , where qi t G 0; iIt G 0; oi t G 0.. It therefore follows that iIt is less than or equal to qi t and, consequently, in the period T, the maximum possible value of Vi I is Q i . Data were gathered on the sales over the post-innovation period for 77 of the 107 VSCs, and the mean cumulated outputs for these known firms were calculated for the periods of four and six years following innovation Table 5.. 15,16 Because it is easier to gather data on larger or growing companies than on companies that remained small or which closed, and because even amongst the known companies the mean cumulated output was heavily influenced by a few very high values a single firm
In the UK, small companies are not legally obliged to disclose their annual sales in their accounts. This means that for many firms these data can only be obtained on goodwill basis from the companies themselves and some refused to assist. Twenty of the 30 companies for which adequate data could not be compiled had closed by the early 1990s, whilst most of the others were known to have remained very small operations. 16 The periods of 4 and 6 years were chosen for practical reasons. Four years because that was the period referred to in the questionnaire; 6 years because that was the longest period over which data could be gathered for many of the companies. It is notable, however, that innovations are typically imitated in less than 3 years Mansfield et al., 1981; Levin et al., 1987; Cohen and Klepper, 1996., which suggests that the period of 4 to 6 years is that during which the bulk of the private returns to innovation are appropriate. In making the calculations, the year of innovation YI. was known, but the month of innovation was not. It was therefore assumed that the innovation was introduced halfway through that financial year. For the analysis based on 4 years, the summations were based on sales in the years YIq1, YIq2 and YIq3, plus 1r2 of sales in YI and YIq4. For the analysis based on 6 years, the sums were based on the years YIq1, . . . ,YIq4, plus 1r2 of sales in YI and YIq6.
15
B.S. Tetherr Research Policy 27 (1998) 725745 Table 5 Estimating the mean value of the innovations introduced by the very small companies
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4 years t s 4.
Very small companies (VSCs) (149 employees at innoation) I
6 years t s 6.
25.4 465.9 10.6 21.3 17.4 407.0 4.8 13.9 21.9 312.2 7.0 17.7
77 Known firmsmean cumulated output: Q 77 Known firmslargest cumulated output: Max Q i . i . 77 Known firmsmedian: Median Q
16.6 395.8 5.7 13.5 11.2 356.5 2.2 8.7 13.7 265.2 4.3 11.1
Approximate mean cumulated output per firm for all 107 firms: Q VS C
II
77 Known firmsmean increased output: IQ 77 Known firmslargest increased output: MaxIQ i . 77 Known firmsmedian: MedianIQ i .
Approximate mean increased output per firm for all 107 firms: IQ VS C III 57 Known firmsmean estimated innovation output: eV I 57 Known firmslargest innovation output: MaxeViI . 57 Known firmsmedian: MedianeViI . I Approximate mean innovation output per firm for all 107 firms: eVVS C
Very large companies (VLCs) (1000 q employees at innoation) 124 known firmsmedian cumulated output: Median Q i . VLC I II III
995.1 1.36% 0.87% 1.12%
1525.8 1.40% 0.90% 1.16%
Q VS C as a percentage of Median Q i . VLC IQ VS C as a percentage of Median Q i . VLC I VS C as a percentage of Median Q i . VLC eV
All output figures are in 91 millions. See Section 6.1 for definitions of cumulated output, increased output, and estimated innovation output.
accounted for 31% of the total., it was not safe to assume that the means for the T periods for all 107 firms were the same as those for the 77 known firms. Instead, for both the 4 and 6 year periods, the medians for the 77 known firms were used as proxies for the means of the 30 unknown firms. This provided an approximate mean cumulated output for all 107 VSCs in the 4 years after innovation of 9113.5 m, whilst 91 21.3 m was the approximate mean cumulated output for the 6 years after innovation Table 5.. I As an estimate of V VSC , however, Q VSC certainly exaggerates the value of the innovations to their innovators. in the T period, because many of the companies continued to sell other products in the T i.e., oi t ) 0.. Two other ways of estimating period I V VSC were therefore devised. The second method assessed the mean increased output IQ VSC . of the VSCs. This assumed that during the period T, the other sales of the innovat-
ing company i remained in real terms. at their level prior to the introduction of the innovation i.e., oi0 s oi t , where oi0 s qi0 .. Thus, for the individual firm i t in the T period, IQ i s S ts1 qi t y qi0 .. This was set to zero if negative. For the same reasons as described above for the cumulated output of the VSCs, it was not appropriate to assume the mean increased outputs for the 30 unknown firms were the same in the 4 and 6 year periods as those found for the 77 known firms. Again, to provide approximate mean values for all 107 VSCs Table 5. in these periods, the median values for the known firms amongst the 70 for which IQ i ) 0. were used as proxies for the mean values of the unknown firms. This provided an approximate mean increased output for all 107 VSCs of 91 8.7 m in the 4 years after innovation, and an approximate mean of 9113.9 m for the 6 years after innovation. The third method of estimating the mean value of the innovations was possible for only 57 of the VSCs
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Table 6 Company size and the innovations impact on the turnover 443 Cases Essential Very Important Important Insignificant Closed Acquired then closed No response 1 to 49 Employees 30 37%. 17 21%. 16 21%. 6 7%. 14 13%. 6 18 50 to 199 Employees 24 30%. 31 37%. 23 28%. 2 2%. 4 4%. 21 200 to 499 Employees 9 23%. 12 31%. 14 36%. 2 5%. 2 4%. 12 500 to 999 Employees 2 9%. 9 42%. 6 28%. 1 5%. 5 16%. 1 8 1000 q Employees 16 17%. 37 39%. 36 38%. 5 5%. 1 1%. 5 48
The figures in parentheses are the percentage distributions of each category after the acquired then closed and no response frequencies have been redistributed on a pro rata basis to all categories except closed.
because it required both financial data and that the companies had answered the postal questionnaire survey. The survey asked the importance of the innovation to the innovating companys turnover in the 4 years after its introduction. Four responses were allowedEssential: the innovation was the mainstay of the company; Very important: the innovation was more important than other productsrprocesses; Important: though no more so than other productsrprocesses; or Insignificant: the innovation did not reap financial benefits. Table 6 shows the pattern of responses received for all the company size categories, but it is those for the VSCs that currently concern us. By converting these responses into the proportional variable ri , it was possible to calculate an estimate of the value of the innovations to their innovators, eViI , where eViI s ri Q i . For the VSCs, it was assumed that ri s 1 if essential, ri s 0.67 if very important, ri s 0.5 if important and ri s 0.25 if insignificant. These proportions were arbitrary, but were intended to be generous, such that they were more likely to overestimate than underestimate the value of the innovations to their innovators during the T period. Again, for each T period, it could not be assumed that the mean value for the 57 known firms was the same as the mean value for all 107 firms. However, in this case, the unknown firms were divided into two groups. The first was the 20 firms for which financial data were available, but not questionnaire data. For each T period the mean value of the innovations from these firms was assumed to have been the same as the mean value
found for the 57 known firms. The second group of unknown firms was the 30 for which neither financial nor questionnaire data were available. For the reasons discussed above in relation to the cumulated output of these companies, and for each T period, the median value of the innovations from the 57 known firms was used as a proxy for the mean value of the innovations from these 30 unknown firms. This provided an approximate mean of the I estimated innovation output eVVSC . for all 107 VSCs of 9111.1 m for the 4 years after innovation, and an approximate mean of 9117.7 m for the 6 years after innovation. To summarise, therefore, this analysis suggests that in the 4 years after innovation the mean sales value to the innovator. of the innovations introduced by the VSCs was almost certainly less than 9113.5 m, and probably closer to 9110 m. Whilst in the 6 years after innovation, the corresponding figures were 91 21.3 and 9115. 6.2. Considering the alue of the innoations introduced by the ery large companies If the assumption of equal values is correct and assuming PiI does not vary systematically with the size of the innovating firm. then the mean value of the innovations to their innovators during the T I , should be the same for all the size period, V categories of companies, including the very small VSCs. and the very large VLCs, i.e., those which I had 1000 or more employees at t s 0.. Thus V VLC s I VSC . Amongst the VLCs, the median cumulated V
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output Median Q i . VLC . in the 4 years after the introduction of the innovations was 91 995 m for the 124 companies for which data could be compiled, while the median for the 6 year period was 911526 I m. 17 Consequently, an innovation of value V VSC would have accounted for less than 1.5% of the total sales of the average VLC in the 4 or 6 years after innovation, and most probably for no more than 1% of that companys sales Table 5.. Table 6 shows 17% of the innovations introduced by the VLCs were considered essential to their companies sales in the period following their introduction, and a further 39% were considered very important to their companies sales during this period. It seems unlikely, therefore, that, on average, the innovations introduced by the VLCs had such a trivial impact on these companies sales. Indeed, some limited additional evidence on the actual private value of the innovations shows that this was not the case. I I If V VLC s V VSC , then the total expected value of the 148 innovations introduced by the VLCs would I I be 148 = V VSC . The highest possible value of V VSC I I is Q VSC , so 148 = Q VSC provides the highest estimate of the total expected value of the innovations introduced by the VLCs. This value was ; 91 2000 m over the 4 years after the introduction of the innovations, and ; 91 3200 m over the 6 year period. When estimating the value of the innovations introduced by the VSCs, it was shown that the distribution of innovations by value was highly skewed, such that a small number of innovations had a large influence on the mean value of the whole group. This was almost certainly also the case for the innovations introduced by the other categories of firms, including the VLCs. One of the exceptionally high value innovations introduced by the VLCs was the computer system listed as innovation A in
Table 2. The Queens Award application form for this innovation reveals that it generated sales in excess of 91700 m within 3 years of its introduction. 18 Other very high value innovations introduced by VLCs included the drugs, Zantac and Retrovir. According to Glaxos annual reports, sales of Zantac exceeded 91 800 m within 4 years of its introduction, and 91 2000 m within 6 years. 19 Wellcomes annual reports reveal sales of Retrovir exceeded 91 500 m and 91900 m within these periods. In addition, the combined sales of four other drugs on the data-set Augmentin, Ceftazidime, Tracium and Zovirax. exceeded 91700 m and 911800 m in these periods. 20 The combined sales of these seven innovations exceeded 91 2700 m in the 4 years after their introduction, and 91 5400 m in the 6 years after their introduction. As these values exceed significantly the total expected value for all 148 innovaI tions introduced by VLCs i.e., 148 = V VSC ., it is mathematically impossible that, in this study, the mean value of the innovations introduced by the VLCs was equal to the mean value of the innovaI I tions introduced by the VSCs i.e., V VLC / V VSC .. I Assuming Pi does not vary systematically with the size of the innovating company where PiI Vi I ., it can be concluded that, for the data-set s Vi examined in this study, the mean value of the innovations introduced by the VLCs was greater than that of the innovation introduced by the VSCs i.e., V VLC ) V VSC .. Assuming the relationship is linear, this suggests the mean value of the innovations increased with the size of the companies responsible for their introduction. However, before accepting this conclusion, it is worth considering the extent to which it is reasonable to assume that PiI did not vary systematically with the size of the innovating companies.
In contrast to the VSCs, the primary reason why data could not be gathered for the VLCs was that for some consolidated enterprises it was not possible to identify divisional sales where the division was the company level in this analysis. Only six VLCs had closed by 1991, five of these following their acquisition and absorption into other firms. It was therefore appropriate to use the medians for the known firms as proxies for the medians of all 148 VLCs.
17
This innovation was described as having been essential to the innovating companys turnover in the post-innovation period. It accounted for a fifth its companys total output in the 3 years after its introduction. 19 This was almost 30% of Glaxos total group sales during the 6 year period. 20 Authors estimates from data available in the annual reports of Glaxo, Wellcome and SmithKline. Beecham.
18
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Table 7 Company size and the market gained relative to expectations 443 Cases Much larger Slightly larger Equal to expectations Smaller Failed to gain a market Closed Acquired then closed No response 1 to 49 Employees 25 31%. 10 13%. 17 21%. 15 19%. 2 3%. 14 13%. 6 18 50 to 199 Employees 20 24%. 17 20%. 30 36%. 12 14%. 1 1%. 4 4%. 21 200 to 499 Employees 10 26%. 6 16%. 16 42%. 3 8%. 2 5%. 2 4%. 12 500 to 999 Employees 6 28%. 1 5%. 6 28%. 4 19%. 1 5%. 5 16%. 1 8 1000 q Employees 21 22%. 17 18%. 41 43%. 14 15%. 1 1%. 1 1%. 5 48
The figures in parentheses are the percentage distributions of each category after the acquired then closed and no response frequencies have been redistributed on a pro rata basis to all categories except closed.
6.3. Reconsidering one of the underlying assumptions In general, there are two ways in which the proportion PiI might increase with the size of the innovating companies at t s 0 i.e., qi0 ., such that, while Vi I tends to increase with qi0 , Vi remains unrelated to qi0 . 21 The first is if the share of the total value of the innovation appropriated by the innovating company firm tends to increase with qi0 . 22 Whilst the second is if the proportion of the total value of Vi concentrated in the period T tends to increase with firm-size. It is certainly feasible that the proportion of the total value of the innovation appropriated by the innovating firm increased with the size of the innovating firm, but the limited available evidence is less than overwhelming in support of this contention. The questionnaire asked the innovating companies how successful they had been at gaining a market for their innovations relative to their expectations prior to the introduction of their innovations. Table 7 shows the pattern of responses across the size categories of innovating companies. This distribution
shows the VSCs were indeed more likely than their larger counterparts to achieve a smaller market than they had expected, but they were also just as likely as their larger counterparts to gain a market larger than expected. 23 Essentially, the distribution suggests large firms were better at achieving the market expected for their innovations. This is probably due to a combination of their greater understanding of the nature and size of their markets gained through greater market research. and their greater initial market power. However, although the distribution provides some support for the contention that the smaller companies tended to appropriate a smaller proportion of the direct value of their innovations than the larger companies, it also suggests that, on average, the differential was not huge. Other things being equal, it appears that while appropriation increased with company size, it probably did not increase sufficiently to rescue the null hypothesis of equal values. 24
21 These are the circumstances under which Vi yVi I declines with firm-size qi0 . 22 These are the circumstances under which, other things being equal, spillovers through imitation andror the consumers surplus tend to decline with the size of the innovating firm.
23 Furthermore, a greater proportion of the smallest companies had ceased trading, which may well reflect their failure to gain the market expected of their innovations. 24 As the mean is largely dependent on the very high value innovations VHVIs., it may have been that the small firms failed to appropriate the value of their VHVIs, whereas the large firms succeeded in appropriating the value of their VHVIs. Large firms may also have been more successful at reducing the consumers surplus than small firms. 25 This would imply that the length of an innovations life cycle tends to decrease with increasing firm-size.
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No data can be presented with regard to the proportion of the total value of the innovations con centrated in the period T, but it seems unlikely that this proportion increased systematically with qi0 . 25 Both small and large firms operate in the same commercial context, so they can be expected to gather the returns to innovation within similar time frames. 26 Consequently, for the data-set of innovations ex amined in this study it is possible that PiI increased with the pre-innovation size of the innovating com panies qi0 ., but it seems unlikely that PiI increased sufficiently steeply with qi0 to rescue the assumption of equal direct. values. The extent to which the findings from this data-set can be assumed to also apply to the other object-based studies of innovation will be considered in the conclusions. Before that, however, Section 7 considers how, for this study, the pattern of innovativeness by firm-size changes if the assumption of equal values is replaced by systems of weights.
the distribution of innovativeness at the enterprise level. 7.1. Unweighted analysis of innoatieness by company size Table 8 shows the distribution of innovativeness by company size according to the ratio R j Pavitt et al., 1987, Tether et al., 1997., where: Rjs ij ej s IjrSj Ij EjrSj Ej .
7. The implications of unequal values for innovativeness by firm-size This section shows how the pattern of innovativeness by firm-size changes when the assumption of equal values is replaced by systems of weights, with the weights assigned to the innovations increasing with the size of the innovating firms at t s 0. Although the analysis is undertaken at both the company and the enterprise levels, it is stressed that the weights were only directly applied at the company level. These company level weights indirectly affect
Here, the js are the employment size-band classifications of companies i.e., 149, 50199, 200499, 500999, 1,00 q ., Ij is the number of innovations introduced by companies in the size band j, and Ej is manufacturing employment in all companies in the size band j. 27 R j is therefore the unweighted. share of the innovations introduced by companies in the size-band j relative to the share of manufacturing employment in companies in the size-band j. 28 This unweighted analysis found the two smallest categories of companies had introduced a share of the innovations larger than their share of employment, whilst the larger companies had introduced a smaller share of the innovations than their share of employment. Overall, this analysis found small companies those with fewer than 500 employees. had introduced 1.34 times as many innovations per employee as the large companies those with 500 or more employees..
26 If there is any relationship, it seems likely that, with their more limited internal resources and, ceteris paribus, the greater need to borrow money for investment, the value of innovations introduced by smaller firms is more likely to be relatively concentrated in the years immediately following their introduction. It is also notable that the value of the high value drug innovations Zantac, Retrovir, etc.. introduced by large firms was spread over a much longer time period than was apparent for the high value innovations introduced by the small companies.
Because no company level data were available, the employment data used were those given for the establishment level in the Census of Production. 28 Because the analysis covers a period 19771990. during which the manufacturing sector in the UK underwent tremendous change, the various ratios R j , RW , R k and RW . reported are j k aggregated weighted averages of analyses over four sub-periods. The weighting for each period being proportional to the periods share of the total number of innovations included in the analysis. The periods were 19771979: 85 innovations; 19801982: 137 innovations; 19831985: 130 innovations; 19861990: 91 innovations. The years 1978, 1981, 1984 and 1987 were used to provide the data on manufacturing employment for each of these periods, respectively.
27
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Table 8 Company size and the share of innovations relative to the share of employment Company size category j . 149 Employees VSC. 50199 Employees 200499 Employees 500999 Employees 1000 q Employees VLC. All small 1499.: RW all Sm All large 500 q .: RW Large RW allrRW Sm Large RW s j wj I jrSj wj I j E j rS j E j Unweighted R 1. j 1.39 1.32 0.68 0.55 0.96 1.14 0.85 1.34 Weighted R 2. j 0.94 1.07 0.65 0.63 1.30 0.89 1.12 0.79 Weighted R 4. j 0.59 0.80 0.58 0.66 1.68 0.66 1.37 0.48
The js are the employment size-band classifications of companies i.e., 149, 50199, 200499, 500999, 1000 q ., I j is the number of innovations introduced by companies in the size band j, and E j is manufacturing employment in all companies in the size band j, wj is the weighting variable, where 1 F wj F W. For the category of the smallest firms, the VSCs, w VSC s 1, whilst for the largest firms, the VLCs, w VL C s W.
7.2. Weighted analyses of innoatieness by company size A weighted version of this ratio, R W, can be j derived using the formula: RW s j w j I j rS j w j I j EjrSj Ej .
Here, the variables are the same as previously, but the weighted variable wj has been added, where 1 F wj F W. For the category of the smallest companies, the VSCs, w VSC s 1, whilst for the category of the largest companies, the VLCs, w VLC s W. W is therefore also the differential in the weighting assigned to the innovations introduced by the largest companies relative to the weighting assigned to the innovations introduced by the smallest companies i.e., W s w WL C rw VSC .. The weights for innovations introduced by the three intermediate company size categorisations increased incrementally and were derived by geometric progressions between one and W.29
In general, R W, is therefore the weighted share of j innovations introduced by firms in size-band j relative to the share of manufacturing employment in size-band j. R 1. is the special unweighted. case j where W s wj s 1. Apart from this unweighted case, which was discussed above, Table 8 also assesses the pattern of innovativeness when W s 2 and W s 4. The resulting ratios of innovations relative to employment are denoted R 2. and R 4., respectively. j j It is stressed that these weightings are arbitrary and are not intended to estimate accurately the true relative importance of the average innovations introduced by the different size-categories of companies. But it is also stressed that these weightings are deliberately conservative i.e., W was kept small., in the sense that it is probable that the mean value of the innovations introduced by the VLCs was much more than four times the mean value of the innovaI tions introduced by the VSCs i.e., V VLC ) 4 = I 30 V VSC .. Instead of showing the true pattern, the purpose of this analysis is to show how dramatically the pattern of innovativeness by firm-size changes even when subject to relatively small weightings.
29 Thus, when W s 2, the weights for companies of employment size-bands 149, 50199, 200499, 500999 and 1000q were 1, 1.19, 1.41, 1.68 and 2, respectively, whilst when W s 4, the weights were: 1, 1.41, 2, 2.83 and 4. Potentially, there are a number of ways of calculating the intermediate weights, but experimentation found different systems had very little effect on the pattern of RW. j
30 According to the analysis in Section 6, and other things being equal, an innovation with four times the mean value of the innovations introduced by the VSCs would still account for only about 4% of the turnover of the median VLC in the 4 or 6 year period after innovation.
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In the analysis based on W s 2, the share of innovations introduced by the two smaller categories of companies was much closer to their share of employment. Meanwhile, the share of innovations introduced by the VLCs became considerably greater than their share of employment. Overall, when W s 2, small companies were found to have been less innovative than large companies. In the analysis based on W s 4, the share of innovations introduced by the two smaller categories of companies became considerably smaller than their share of employment and, overall, large companies were found to have been about twice as innovative small companies.
7.3. Unweighted and weighted analyses of innoatieness by enterprise size The analyses were then repeated at the enterprise level, although the weights were still applied at the company level. Hence: RW s k
Sj wj IjkrS k Sj wj Ijk .
EkrS k Ek
Here, the ks are the employment size-band classifications of enterprises i.e., 149, 50199, 200499, 500999, 10009999, 10,00019,999, 20,000 q .. So, R 1. is the unweighted share of the innovations k
introduced by enterprises in the size-band k relative to the share of manufacturing employment in all enterprises in the size-band k, whilst R 2. and R 4. k k are, respectively, the weighted versions of this ratio when W s 2 and W s 4. In the unweighted distribution, R 1. displays a k clear u-shape Table 9., very similar to that found by Pavitt et al. for the last years of the SPRU innovations database see Table 4 in Pavitt et al., 1987.. This distribution implies that the four extreme categories of enterprises by size were more innovative than their shares of employment implied, whereas enterprises in the intermediate size categories were less innovative than their shares of employment implied. Overall, however, the distribution found small enterprises those with fewer than 500 employees. had introduced 1.25 times as many innovations per employee as large enterprises those with 500 or more employees.. The distributions of R 2. and R 4. show how k k dramatically the pattern of innovativeness by enterprise size changes even when using relatively conservative weights. In the analysis based on W s 2, the share of innovations introduced by the two smaller categories of enterprises fell to just below their share of employment. This left only the two largest categories of enterprises as sources of disproportionally large shares of the innovations relative to their employment. Instead of being u-shaped, the pattern of innovativeness by enterprise size became j-shaped
Table 9 Enterprise size and the share of innovations relative to the share of employment Enterprise size category k . 149 Employees 50199 Employees 200499 Employees 500999 Employees 10009999 Employees 10,00019,999 Employees 20,000 q Employees All small 1499.: RW all Sm All large 500 q .: RW Large W W R Sm allrR Large RW s k Unweighted R 1. j 1.36 1.18 0.72 0.67 0.46 1.14 1.57 1.15 0.92 1.25 Weighted R 2. j 0.94 0.97 0.64 0.63 0.46 1.40 1.97 0.88 1.07 0.82 Weighted R 4. j 0.36 0.52 0.42 0.49 0.43 1.84 2.70 0.43 1.32 0.32
Sj wj I jkrS k Sigma j wj I jk .
E k rS k E k
The variables are the same as in Table 8, except that the ks are the employment size-band classifications of enterprises i.e., 149, 50199, 200499, 500999, 10009999, 10,00019,999, 20,000 q ..
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and, overall, small enterprises were found to have been less innovative than large enterprises. In the analysis based on W s 4, the five categories of enterprises with fewer than 10,000 employees were all found to have introduced no more than half the innovations expected by their shares of employment. By contrast, the largest category of enterprises those with 20,000 q employees. introduced a share of the innovations 2.7 times greater than that expected by its share of employment. Overall, in this analysis, large enterprises were found to have been three times as innovative relative to their employment as small enterprises. This analysis shows how dramatically the conclusion relating innovativeness to firm-size changes even when relatively conservative weights i.e., W is small. are used to compensate for the higher average values of the innovations introduced by larger companies. Instead of finding small companies and enterprises are more innovative than large companies or enterprises because they introduced a larger number of innovations per employee than their larger counterparts., the conservatively weighted analysis shows the opposite. Relative to their employment, large companies or enterprises were more innovative than small companies or enterprises. This highlights the importance of the assumption of equal values in determining the relationship between firm-size and innovation.
8. Conclusions In recent years a number of studies based on innovation counts have found that small firms have introduced more innovations per thousand employees than their larger counterparts. This has been widely interpreted as indicating that small firms are more innovative than large firms, or that small firms are more efficient innovators than large firms Rothwell and Dodgson, 1994; Cohen, 1995, Cohen and Klepper, 1996.. This interpretation, however, depends on the important assumption that, on average, the value of the innovations introduced did not increase systematically with the size of the innovating firms. The significance of this assumption was addressed directly in Section 7, the last analytical section of the paper. That analysis showed how, for the data-set of
innovations examined, the pattern of innovativeness with respect to firm-size changes if, instead of being unrelated to the size of the innovating firms, the average value of the innovations is assumed to have increased with the size of the innovating firms. More specifically, it was shown that under those circumstancesand even when using relatively small differential weightingslarge firms rather than small firms appear to have been the more innovative. It is, however, one thing to show how sensitive results are to an assumption, it is another to prove that the assumption is invalid. Sections 5 and 6 of the paper attempted to examine the validity of the equal values assumption through a database of significant innovations introduced in the UK during the 1980s. In so doing it should be emphasised that, for practical reasons, the analysis was based on sales data i.e., revenues. as the indicator of the direct value of the innovations. This is certainly an imperfect measure; value added would have been preferable, and furthermore it does not capture two aspects of the direct value of the innovations: the value lost to other producers through imitation, and the consumers surplus. Beyond this, the analysis also ignored the indirect value of the innovations. Accordingly, it could be argued that this paper has measured only one aspect of the value of the innovations and done so imperfectly. Consequently, it could be argued that nothing can be stated from these analyses about the veracity or otherwise of the assumption of equal values. A more positive interpretation is, however, that the paper has attempted to assess something that, for practical reasons, is extremely difficult to measure, and that the findings are at least sufficient to raise questions about the standard interpretation of results from object-based data-sets which relate firm-size to innovation and innovativeness. In the remainder of this concluding section, it will be assumed that these revenue-based results have shown that, for the data-set of innovations analysed, the direct. value of the innovations tended to increase with the size of the innovating firms. Consequently, and specifically in relation to the data-set examined, the interpretation that small firms are more innovative or more efficient innovators. than large firms because they have introduced a larger number of innovations relative to their employment is unsound.
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The question which then arises is how far is it possible to generalise from the results of this study to other studies based on innovation counts. If revenues are assumed to be a reasonable indicator of direct. value, the answer to that question may lie in the distribution of extremely high value innovations. Throughout the analysis, it has been shown that in a sample of innovations a small number will account for a large proportion of the total direct value of the sample. 31 This reflects the fact that the distribution of innovations by value is highly skewed. Consequently, the number and value of the very high value innovations largely determines the mean value of the set of innovations. This is important, because if sample composition is stochastic it is possible that another sample might have found the smallest firms had introduced a greater number of the very high value innovations than was the case in the data-set analysed. In such a sample the mean direct value of the smallest firms innovations could conceivably be greater than the mean direct value of the innovations introduced by the largest firms. The question therefore becomes, to what extent is the distribution of extremely high value innovations likely to be stochastic with respect to the size of the innovating firms? An indirect answer to this question lies in the evidence on the growth of firms. If a small firm introduced and appropriated the returns to a very high value innovation, then it must show very rapid growth. It is instructive, therefore, that the evidence on the growth of innovative small firms in the UK has found the rate of growth amongst even the fastest growing new and small firms to be relatively modest Garnsey and Cannon-Brookes, 1993; Westhead and Cowling, 1995; Tether, 1997; Tether and Massini, 1998.. It is especially notable that there is
For example, it was shown in Table 2 that the computer system accounted for 59% of the total sales value of the 23 innovations for which Queens Award application forms were received. In Section 6, it was noted that one exceptional innovation accounted for a third of the total estimated value over 4 years of the innovations introduced by all 57 firms for which both financial and questionnaire data were available. It was also revealed in that the sales of just seven exceptional innovations introduced by very large companies exceeded 91 2.7 billion in the 4 years after their introduction.
31
no evidence of extremely rapid growth amongst the small firm listed on the SPRU Innovations Database between 1975 and 1983 Thwaites and Wynarczyk, 1996.. This suggests that innovative new and small firms in the UK are either failing to appropriate the returns to their extremely high value innovations, or that they a not a source of such innovations. Assuming the latter and given that large firms are knownfrom the data-set analysed in this paperto be the source of some extremely high value innovations, the evidence suggests the distribution of extremely high value innovations in not sufficiently stochastic in the UK to rescue the assumption of equal direct. values. Thus, as well as in the set of innovations examined in this paper, the average value by sales. of the innovations on the SPRU Database probably increased with the size of the innovating firms. This reflects the fact that most of the small firms on both the data-set examined in this paper and on the SPRU Database were niche market specialist suppliers Pavitt, 1984., but it is particularly notable because of the extent to which the evidence from the SPRU Database has been cited in support of the contention that small firms are a disproportionately important source of innovation. The evidence with regard to the growth of innovative new and small firms in Western Europe is similar to that in the UK. The rate of growth of even the fastest growing new and small firms tends to be modest Mustar, 1994; EFER, 1996; Gorrino and Steward, 1996; Autio and Yli-Renko, 1998; Delapierre et al., 1998; Laranja and Fontes, 1998; Licht and Nerlinger, 1998; Storey and Tether, 1998.. Again, assuming this is not because of a failure to appropriate the returns to any extremely high value innovations introduces by new and small firms, and assuming some extremely high value innovations have been introducedby large firmsthe assumption of equal direct. values is called into question for continental Europe. The evidence for the US, by contrast, shows that in that national system of innovation Lundvall, 1993; Nelson, 1993., some new and small firms have introduced and appropriated the returns to some extremely high value innovations e.g. Apple, DEC and Intel.. This raises the question as to how the competitive process, in terms of the role of new and small firms in innovation, differs in the US from that in
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B.S. Tetherr Research Policy 27 (1998) 725745 Delapierre, M., Madeuf, B., Savoy, A., 1998. NTBFsthe french case. Research Policy, 26.9. Edwards, K., Gordon, T., 1984. Characterisation Of Innovations Introduced On The US Market In 1982. Mimeo. Futures Group, Glastonbury, CT, May. EFER, 1996. The European 500Europes 500 fastest growing small firms. The European Foundation for Entrepreneurship Research EFER.. Waterloo, Belgium. Garnsey, E., Cannon-Brookes, A., 1993. The Cambridge phenomenon revisited: aggregate change amongst Cambridge high technology companies since 1985. Entrepreneurship and Regional Development 5. Gellman Research Associates, 1976. Indicators of international trends in technological innovation. Paper prepared for the National Science Foundation, April. Gellman Research Associates, 1982. The relationship between industrial concentration, firm-size and technological innovation. Paper prepared for the Office of Advocacy, US Small Business Administration, May. Gorrino, I., Steward, F., 1996. Review of studies on innovative fast growing SMEs. EIMS Project 94r99, DG XIII, European Commission, Luxembourg. Harrison, B., 1994. Lean and Mean. Basic Books, New York. IMF, 1996. International Financial Statistics Yearbook. International Monetary Fund, Washington. Kleinknecht, A., Reijen, J., Smits, W., 1993. Collecting literature-based innovation output indicators: the experience in the netherlands. In: Kleinknecht, A., Bain, D. Eds.., New Concepts in Innovation Output Measurement, Chap. 3. St. Martins Press, New York. Laranja, M., Fontes, M., 1998. Creative adaptation: the role of new technology based firms in Portugal. Research Policy, 26.9. Levin, R., Klevorick, A., Nelson, R., Winter, S., 1987. Appropriating the returns from industrial R and D. Brookings Papers on Economic Activity. Licht, G., Nerlinger, E., 1998. New technology-based firms in Germany: a survey of the recent evidence. Research Policy, 26.9. Lundvall, B.-A. Ed.., 1993. National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning. Pinter, London. Mansfield, E., Schwartz, M., Wagner, S., 1981. Imitation costs and patents, an empirical study. Economic Journal 91. Methe, D., Swaminathan, A., Mitchell, W., 1996. The under-em phasised role of established firms as the source of major innovations. Industrial and Corporate Change, 5.4. Mustar, P., 1994. Science and innovation, 1995. Annuaire Raisonne de la Creation dEnterprises par les Chercheurs. Economica, Paris. Nelson, R. Ed.., 1993. National Innovation Systems: A Comparative Approach. Oxford Univ. Press, Oxford. OECD, 1990. Description of Innovation Surveys and Surveys of Technology Use Carried Out in OECD Member Countries. OECD, Paris.
Europe, but there is no space to assess that question here. What can be said is that it is more doubtful whether the pattern found in the analysis undertaken in this paper can be generalised to the US context. The assumption of equal values is certainly more robust in the US context than in the UK or European contexts, although some authors have argued or implied. that in the US context innovation counts may significantly under-represent the contribution of large firms to innovations Cohen and Klepper, 1996; Methe et al., 1996.. Acknowledgements I am grateful to Rod Coombs, Jeremy Howells, David Keeble, Silvia Massini, Stan Metcalfe, Pari Patel, Keith Pavitt, David Storey, Nick von Tunzelmann and the anonymous referees for comments on earlier versions of this work. The remaining errors are of course my responsibility. References
Acs, Z., Audretsch, D., 1990. Innovation and Small Firms. The MIT Press, Cambridge, MA. Acs, Z., Audretsch, D., 1993. Analysing innovation output indicators: the US experience. In: Kleinknecht, A., Bain, D. Eds.., New Concepts in Innovation Output Measurement. Chap. 2, St. Martins Press, New York. Archibugi, D., 1988. In search of a useful measure of technological innovation to make economists happy without discontenting technologists.. Technological Forecasting and Social Change 34. Autio, E., Yli-Renko, H., 1998. New technology-based firms in small open economiesan analysis based on the finnish experience. Research Policy, 26.9. Bolton Committee, 1971. Small Firms: Report of the Committee of Inquiry on Small Firms. HMSO, London. Cogan, D.J., 1993. The Irish experience with literature-based innovation output indicators. In: Kleinknecht, A., Bain, D. Eds.., New Concepts in Innovation Output Measurement, Chap. 5. St. Martins Press, New York. Cohen, W., 1995. Empirical studies of innovative activity. In: Stoneman, P. Ed.., Handbook of the Economics of Innovation and Technological Change, Chap. 6. Blackwell, Oxford. Cohen, W., Klepper, S., 1996. A reprise on firm-size and R and D. Economic Journal, 106, July. Coombs, R., Narandren, P., Richards, A., 1996. A literature based innovation output indicator. Research Policy 25.
B.S. Tetherr Research Policy 27 (1998) 725745 OECD, 1992. Oslo ManualOECD-Proposed Guidelines for Collecting and Interpreting Technological Innovation Data. OECD, Paris. Pavitt, K., 1984. Sectoral patterns of technical change: towards a taxonomy and a theory. Research Policy 13. Pavitt, K., Robson, M., Townsend, J., 1987. The size distribution of innovating firms in the UK: 19451983. Journal of Industrial Economics 35 3., 297316. Rothwell, R., Dodgson, M., 1994. Innovation and size of firm. In: Dodgson, M., Rothwell, R. Eds.., The Handbook of Industrial Innovation, Chap. 25. Edward Elgar, Aldershot, Hampshire. Sahal, D., 1983. Invention, innovation and economic evolution. Technological Forecasting and Social Change 23, 213235. Santarelli, E., Piergiovanni, R., 1996. Analyzing literature based innovation output indicators: the italian experience. Research Policy 25. Schumpeter, J., 1934. The Theory of Economic Development. Harvard Economic Studies, Cambridge, MA. Schumpeter, J., 1942. Capitalism, Socialism and Democracy. Harper, New York. Storey, D.J., Tether, B.S., 1998. New technology-based firms in the European union: an introduction. Research Policy, 26.9.
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Tether, B.S., 1996. Virtual panacea and actual reality: small firms, innovation and employment creation; evidence from Britain during the 1980s. Unpublished PhD Thesis. SPRU, University of Sussex. Tether, B.S., 1997. Growth diversity amongst innovative and technology based new and small firms: an interpretation. New Technology Work and Employment, 12.2. Tether, B.S., Massini, S., 1998forthcoming. Employment creation in technological and design innovators in the UK during the 1980s. Forthcoming in Small Business Economics. Tether, B.S., Thwaites, A., Smith, I., 1997. Smaller enterprises and innovation in the UK: the SPRU innovations database revisited. Research Policy, 26.1. Thwaites, A., Wynarczyk, P., 1996. The economic performance of innovative small firms in the South East Region and elsewhere in the UK. Regional Studies, 30.2. Wallmark, J.T., McQueen, D., 1991. One hundred major Swedish technical innovations, from 1945 to 1980. Research Policy 20, 325344. Westhead, P., Cowling, M., 1995. Employment change in independent owner managed high technology firms in Great Britain. Small Business Economics, 11.2.

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Research Policy 27 1998.

Small and large firms: sources of unequal innovations?

Tel.: q44-0-161-275-7376; E-mail: bruce.tether@man.ac.uk

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