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Product Innovations by Young and Small Firms

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Full Report

Research Summary

Product Innovations by Young and Small Firms

No. 408                                                                    May 2013

Jose Plehn-Dujowich, Plehn Analytical Economic Solutions, LLC,
Fountainville, Pa. 28 pages. Under contract number SBAHQ-11-M-0204.

Purpose

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

Background/History

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

Overall Findings

The author generated patent citations per dollar of
research and development stock for firms of varying
sizes and ages. The results for small vs. large firms
and young vs. old firms were similar. Small firms
averaged 1.2626 patent citations per million dollars
of R&D stock versus 0.5712 for large firms. Young
firms averaged 1.2117 patent citations per million
dollars of R&D stock, while old firms averaged
0.5344.

Narrowing the study focus to young small firms
showed them to be highly productive innovators.
Firms below the median size (290 employees) and
age (18 years) averaged more patent citations per
million dollars of R&D stock than old large firms,
1.7535 versus 0.3424, respectively.

The author created an econometric model to control
for industry, to see if the results were more of
a reflection of the industries the firms operated in
rather than of their size and age. The results held,
with both size and age having a negative effect on
R&D productivity.

The research also found, as expected, small manufacturing
firms have a narrower product range than
large firms. In 2007, small manufacturing firms averaged
about 12 products while large firms averaged
about 17 products. The average firm sold 13 products.
Relatively young manufacturers (under about
10 years old), sell 5 to 6 products while relatively
old manufacturers (about 50 years or older) sell 16
to 18 products. A more focused product range from
small business could help them in innovating, as they
are in a better position to understand their products
and markets.

Policy Implications

Based on the research findings—that innovation is
characteristic of both young and small firms—policymakers
should realize supporting innovative small
firms is often akin to supporting innovative young firms.

Scope and Methodology

The research relies upon two data sources: the
Thomas Registry of American Manufacturers and
a National Bureau of Economic Research (NBER)
dataset. The Thomas Registry contains product cat-
egory data for over 1 million publicly and privately
held establishments, including firm size and age;
data for 2002 and 2007 were used. A model of R&D
productivity with firm age and size (measured in
terms of employment and sales) was tested that used
the NBER data from 1965 to 1995. The NBER data
set matched patenting data with a Compustat database
on R&D expenditures of publicly held companies.

The report understates firm age, in that it was
defined by the year that the firm went public or was
listed in Compustat; firms born before 1950 were
excluded. In addition, the Compustat data over-
represents large firms, as its average firm size is 977
employees with $145 million in sales.

This report was peer-reviewed consistent with
Advocacy’s data quality guidelines. More information
on this process can be obtained by contacting
the director of economic research at
advocacy@sba.gov or (202) 205-6533.

Additional Information

This report is available on the Office of Advocacy’s
website at www.sba.gov/advocacy/7540. To receive
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This document is a summary of the report identified above, developed under contract for the Small Business Administration, Office
of Advocacy. As stated in the report, the final conclusions of the full report do not necessarily reflect the views of the Office of
Advocacy. This summary may contain additional information, analysis, and policy recommendations from the Office of Advocacy.