Invention Value, Inventive Capability and the Large Firm Advantage
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ARTICLE SUMMARY
Large firms have an advantage in innovation. A new model shows that large firms are better at commercializing new inventions. The advantage is less in sectors where innovators can easily license technologies to other firms.
POLICY RELEVANCE
Policymakers could help the economy by reducing barriers to entry for small innovative firms.
KEY TAKEAWAYS
- Large firms have an advantage in innovation, but scholars are not sure why; large firms spend proportionately more on research and development (R&D) than small firms, and earn more per R&D dollar spent than small firms.
- A new model explores whether large firms have an innovation advantage because they are better at the inventing process, or because they are better able to commercialize their inventions.
- The model predicts that if large firms are better at inventing, they should produce inventions of higher quality.
- On the other hand, if large firms are better at commercializing new inventions, they will tend to produce inventions of lower quality.
- The model predicts that if large firms are better at inventing, they should produce inventions of higher quality.
- The private value of an invention can be measured by the patent’s market value, or by treating inventions patented in multiple jurisdictions as more valuable; patent quality can be measured by the number of citations a patent receives in future patents.
- Generally, there is a positive relationship between the size of the inventing firm and the value of the invention.
- Using data from publicly traded firms based in the United States between 1980 and 2015, analysis shows that on average, the quality of inventions decreases with the size of the firm; thus, large firms' main advantage lies in commercialization.
- When firm size doubles, the quality of inventions decreases about three percent.
- This pattern holds when the highest quality patents held by large firms are compared to the highest quality patents held by smaller firms.
- When firm size doubles, the quality of inventions decreases about three percent.
- Capturing the value of inventions through commercialization requires capabilities such as product development, manufacturing, marketing, and distribution.
- When markets allow innovative firms to sell their inventions easily, the tie between firm size and invention value and quality is weaker; firms need not commercialize their own inventions.
- The link between firm size and invention quality is 11 percent weaker in sectors where technology is often licensed and patents are commonly reassigned.
- When commercialization needs are not firm-specific and innovative firms can acquire commercialization abilities by contract, the link between size and quality is weaker.
- The link between firm size and invention quality is 11 percent weaker in sectors where technology is often licensed and patents are commonly reassigned.
- The degree to which a firm diversifies its portfolio to span a wide range of technologies affects its ability to invent; diversification tends to reduce the private value of inventions, and tends to increase invention quality.
- Policymakers could benefit the economy by supporting smaller innovation-intensive firms, because they are focused on high-quality inventions; policymakers could ensure that large firms cannot suppress market entry.
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About Wesley Cohen
Wesley M. Cohen is Professor of Economics and Management and the Snow Family Professor of Business Administration in the Fuqua School of Business, Duke University. He also holds secondary appointments in Duke’s Department of Economics and School of Law, is a Research Associate of the National Bureau of Economic Research, and serves as the Faculty Director of the Fuqua School’s Center for Entrepreneurship and Innovation. Professor Cohen’s research focus is on the economics of technological change.
