The common myth is that big companies are generally pretty useless at innovation.  They have legacy businesses that block attempts to change, and their huge structure makes it hard to pivot in new directions.

It’s a myth that has a degree of sense to it, but it might still be kinda wrong.  That’s the argument from researchers at Olin Business School at Washington University in St. Louis at least, who in a recently published paper argues that they may not be as bad as we think.

Indeed, the data shows that big firms do around 87% of the innovation in the United States, investing nearly 6x as much in R&D as smaller firms.  The findings emerged after the team trawled through data from the National Science Foundation’s Business R&D Innovation Survey (BRDIS), which has been conducted every year since 2008.

Research approaches

The team focused on data from around 2,000 firms who had been investing in R&D with the aim of exploring whether smaller firms were more productive in their investments than larger firms.

Their analysis did uncover a clear difference in how companies invest in R&D, with smaller firms focusing more on development than research.  They also invested more in radical innovation (as opposed to incremental innovation) and focused more on product than process innovation.

Despite this difference in approach however, there appeared to be no real evidence that smaller firms were more productive at innovating than their larger peers, or indeed that productivity declined as the firms grew in size.

The authors contend that much of the problem with this skewed perception is that innovation is often measured in terms of patents and products rather than a return on R&D.

Research returns

To rectify that, the researchers defined a ‘research quotient’ (RQ), which they defined as the output elasticity of the R&D investment by a company.  In other words, it refers to the change in revenue derived from a change in R&D expenditure, and the team relied upon hard financial data from companies rather than patents and other innovation outputs.

When viewed through this lens, larger firms nearly always outperformed their smaller peers, regardless of the form of R&D they engaged in.  The authors contend that this is because the larger firms are better able to exploit their breakthroughs due to their size, and indeed can spread their spending across the business rather than putting all of their eggs in one basket.

“The main takeaways are these: The idea that large firms can buy small firms to replace their own R&D is just disastrous. If we have to start rebuilding the R&D engine from scratch, it will be impossible,” the authors conclude. “The second is that large firms shouldn’t try to operate like small firms to become more productive—they already are more productive.”