Abstract
Emphasizing the dynamics in economies and industries, Schumpeter points to entrepreneurs carrying out ‘new combinations’. His work, and in particular the Theory of Economic Development, is often interpreted as praising individual entrepreneurs setting up new firms to contribute to an industry’s innovativeness. This has come to be referred to as the Schumpeter Mark I perspective. Later, however, in his Capitalism, Socialism, and Democracy, Schumpeter has rather suggested that large incumbents are best positioned to contribute to an industry’s innovativeness (Schumpeter Mark II). In this discussion, however, the possibly different effects of structural as opposed to dynamic industry competitiveness is often not taken into account. In addition, the contribution of new and small firms to industry innovativeness are often conflated. Using New Product Announcements as a measure of innovation, we find that industries dominated by small firms prove consistently and significantly more innovative than industries where large firms dominate. Taking account of industries’ structural and dynamic levels of competition, we find that high existing and increasing levels of new firms entering an industry, exercising what Schumpeter called the ‘entrepreneurial function’, actually decrease industry innovativeness. We conclude that the contribution of small firms in terms of industry innovativeness is different from that of large as well as new firms, suggesting a Schumpeter Mark III perspective.
Similar content being viewed by others
Notes
Some have looked at the reverse, to determine if innovativeness affects industry structure. (Geroski and Pomroy 1990), for instance, argue that innovation will over time lead to less concentrated markets.
Assuming that each firm has a single innovation in the period studied could be seen to under-represent the contribution of large firms to industry innovativeness. The size distribution of firms in the country studied indicates that it will be unlikely (see Leydesdorff et al. 2006 for the Netherlands): very few firms are large. By separately including variables for firm and industry size we further control for the possible bias in the findings. In addition, as Van der Panne (2007) has shown, LBIO data tends to over-emphasize the role of large firms for industry innovativeness.
Changing the period chosen does not change the findings.
In the case of over-dispersion, i.e. σ i > μ i , a Poisson model under-estimates dispersion, resulting in downward biased standard errors (Cameron and Trivedi 1986). The negative binomial regression model addresses this issue by introducing the parameter α, reflecting unobserved heterogeneity among observations. A consequence of the downward biased standard errors is that this estimation model is more conservative than a standard poisson model for count data.
Using the Lerner Index or price-cost margin as a measure of competition and patents as a measure of innovation, Aghion et al. (2005) find that innovativeness was highest when competition was either low or high. In part, the different findings we present may be due to the different measures used. Our data, which includes information on patent ownership, does not indicate that firms size and patent ownership is somehow correlated, however.
References
Aalbers HJ, Dolfsma W, Koppius O (2014) Rich ties and innovative knowledge transfer within a firm, Brit J Man, forthcoming
Abernathy WJ, Clark KB (1985) Innovation: mapping the winds of creative destruction. Res Policy 14(1):3–22
Abernathy WJ , Utterback JM (1978) Patterns of Industrial Innovation. Technol Rev 80:41–47
Acs ZJ, Audretsch DB (1988) Innovation in large and small firms: an empirical analysis. Am Econ Rev 78(4):678–690
Acs ZJ, Audretsch DB (1987) Innovation, market structure, and firm size. Rev Econ Stat 59(4):567–574
Acs ZJ, Audretsch DB (1986) Innovation in large and small firms. Econ Lett 23:109–112
Aghion P, Bloom N, Blundell R, Griffith R, Howitt P (2005) Competition and innovation: an inverted U relationship. Q J Econ 120:701–728
Aghion P, Howitt P (1992) A model of growth through creative destruction. Econometrica 60:323–351
Arrow K (1962) Economic welfare and the allocation of resources for inventions. In: Nelson R (ed) The rate and direction of inventive activity. Princeton UP
Audretsch DB, Keilbach M (2007) The theory of knowledge spillover entrepreneurship. J Man Stud 44(7):1242–54
Audretsch DB (1987) An empirical test of the industry life cycle. Weltwirtsch Arch 123(2):297–308
Audretsch DB, Keilbach M (2008) Knowledge spillover entrepreneurship and innovation in large and small firms. In: Davis JB, Dolfsma W (eds) The Companion to Social Economics. Edward Elgar, Cheltenham
Baker JB (2003) The case for antitrust enforcement. J Econ Perspect 17(4):27–50
Baumol WJ (2010) The microtheory of innovative entrepreneurship. Oxford, UP, Princeton and Oxford
Blundell RW, Griffith R, van Reenen J (1995) Dynamic count data models of technological innovation. Econ J 105:333–344
Boone J (2000) Competitive pressure: the effects on investments in product and process innovation. RAND J Econ 31(3):549–569
Caballero RJ, Jaffe AB (1993) How high are the giants’ shoulders: an empirical assessment of knowledge spillovers and creative destruction in a model of economic growth. In: Lanchard OJ, Fischer S (eds) Macroeconomic Annual, N B E R. MIT Press, Cambridge, MA, p 1993
Cáceres R , Guzmán J, Rekowski M (2011) Firms as a source of variety in innovation: influence of size and sector. Int Entrep Manag J 7:357–372
Cameron AC, Trivedi PK (1986) Econometric models based on count data: comparisons and applications of some estimators and tests. J Appl Econom 1:29–53
Chandy RK, Tellis GJ (2000) The incumbent’s curse? Incumbency, size, and radical product innovation. J Marketing 64:1–17
Christensen CM (1997) The innovator’s dilemma when new technologies cause great firms to fail. Harvard Business School Press
Cohen W, Klepper S (1996) A reprise of size and R and D. Econ J 106:925–951
Cohen W , Levin R (1989) Empirical studies of innovation and market structure. Ch. 18. In: Schmalensee R, Willig R (eds) Handbook of industrial organization, II. North-Holland
Cohen WM (2010) Fifty years of empirical studies of innovation activity and performance. In: Hall B H, Rosenberg N (eds) Handbook of the economics of innovation, vol 1. Elsevier, Amsterdam, pp 129–198
Coombs R , Narandren P , Richards A (1996) A literature-based innovation output indicator. Res Policy 25:403–413
Dolfsma W, Van der Panne G (2008) Currents and subcurrents in the river ofinnovations:explaining innovativeness using new-product announcements. Res Policy 37(10):1706–1716
Dolfsma W (2004) The process of new service development – issues of formalization and appropriability. Intl J of Innov Man 8(3):319–337
Feldman MP, Audretsch DB (1999) Innovation in cities: science-based diversity, specialization and localized competition. Eur Econ Rev 43:409–429
Fontana R, Nuvolari A, Shimizu H, Vezzulli A (2012) Schumpeterian patterns of innovation and the sources of breakthrough inventions: evidence from a data-set of R and D awards. J Evol Econ 22:785–810
Garnsey E (1998) A theory of the early growth of the firm. Ind Corp Change 7(3):523–556
Geroski PA (1990) Innovation, technological opportunity, and market structure. Oxford Econ Pap 42:586–602
Geroski PA, Pomroy R (1990) Innovation and the evolution of market structure. J Ind Econ 38(3):299–314
Granstrand O, Patel P, Pavitt K (1997) Multi-technology corporations: why they have ‘distributed’ rather than ‘distinctive’ core competencies. Calif Manage Rev 39:8–25
Henderson RM, Clark KB (1990) Architectural innovation: the reconfiguration of existing product technologies and the failure of established firms. Admin Sci Quart 35(1):9–30
Jovanovich B , MacDonald GM (1994) The Life Cycle of a Competitive Industry. J Pol Econ 102:322–347
Kamien MI, Schwartz NL (1975) Market structure and innovation: a survey. J Econ Lit 13(1):1–37
Kleinknecht A, Bain D (1993) New concepts in innovation output measurement. Macmillan Martin’s Press, New York
Kleinknecht A, van Montfort K, Brouwer E (2002) The non-trivial choice between innovation indicators. Econ Innov and New Technol 11:109–121
Kleinknecht A, Reijnen JON (1991) More evidence on the undercounting of small firm R and D. Res Policy 20:579–587
Klepper S (1997) Industry life cycles. Ind Corp Change 6:145–182
Klepper S (1996) Entry, exit, growth, and innovation over the product life cycle. Am Econ Rev 86(3):562–583
Klepper S, Graddy E (1990) The evolution of new industries and the determinants of market structure. RAND J Econ 21(1):27–44
Kwasnicky W (1996) Innovation regimes, entry and market structure. J Evol Econ 6:375–409
Lemley MA, Shapiro C (2005) Probabilistic patents. J Econ Perspect 19(2):75–98
Leydesdorff L, Dolfsma W, van der Panne G (2006) Measuring the knowledge base of an economy in terms of relations among technology, organization, and territory. Res Policy 35(2):181–199
Mairesse J, Mohnen P (2010) Using innovations surveys for econometric analysis. NBER working paper 15857
Malerba F (2002) Sectoral systems of innovation and production. Res Policy 31:247–264
Malerba F, Orsenigo L (1997) Technological regimes and sectoral patterns of innovative activities. Ind Corp Chang 6:83–117
Marshall A (1890) Principles of Economics. Macmillan, London
Organisation for Economic Co-operation and Development / European Commission / Eurostat (1992) The measurement of scientific and technological activities – Proposed guidelines for collecting and interpreting technological innovation data (‘Oslo manual’), OECD, Paris
Peltoniemi M (2011) Reviewing industry life-cycle theory: avenues for future research. Int J Manag Rev 13:349–375
Pla-Barber J, Alegre J (2007) Analysing the link between export intensity, innovation and firm size in a science-based industry. Int Bus Rev 16:275–293
Reinganum J (1989) The timing of innovation: research, development, and diffusion . In: Schmalensee R, Willig RD (eds) Handbook of Industrial Organization, vol 2. Elsevier
Scherer FM, Ross D (1990) Industry market structure and economic performance. Houghton Mifflin, Boston
Schumpeter JA (1934) The theory of economic development. Harvard UP, MA
Schumpeter JA (1943) Capitalism, socialism, and democracy, Peter Smith Publisher
Shane S (2009) Why encouraging more people to become entrepreneurs is bad public policy. Small Bus Econ 33:141–149
Shefer D, Frenkel A (2005) R and D, firm size and innovation: an empirical analysis. Technovation 25:25–32
Stock GN, Greis NP, Fischer WA (2002) Firm size and dynamic technological innovation. Technovation 22:537–549
Symeonidis G (2001) Price competition, innovation and profitability: theory and UK evidence. CEPR Discussion Paper, p 2816
Szulanski G (1996) Exploring internal stickiness: impediments to the transfer of best practice within the firm. Strateg Mananage J 17:27–43
Tushman ML, Anderson P (1986) Technological discontinuities and organizational environments. Admin Sci Quart 31(3):439–465
Uhlaner LM, van Stel A, Duplat V, Zhou H (2013) Disentangling the effects of organizational capabilities, innovation and firm size in SME sales growth. Small Bus Econ 41:581–607
Van der Panne G (2004) Agglomeration externalities: Marshall versus Jacobs. J Evol Econ 14(5):593–604
Van der Panne G (2007) Issues in measuring innovation. Scientometrics 71(3):495–507
Van der Panne G , Dolfsma W (2003) The odd role of proximity in knowledge relations – high-tech in the Netherlands. J Econ Soc Geogr 94(4):453–462
Van Dijk B, den Hertog R, Menkveld B, Thurik R (1997) Some evidence on the determinants of large-and small-firm innovation. Small Bus Econ 9:335–343
Vaona A, Pianta M (2008) Firm size and innovation in European manufacturing. Small Bus Econ 30(3):283–299
Vossen RW (1998) Relative strengths and weaknesses of small firms in innovation. Int Small Bus J 16(3):88–94
Author information
Authors and Affiliations
Corresponding author
Additional information
We would like to thank William Baumol, Sharon Belenzon, Florian Noseleit as well as seminar participants at the universities of Groningen, Lund, Utrecht, Windesheim and at a AEA session in New Orleans for their comments and suggestions. In addition, we would like to thank anonymous referees for this journal, and the associate editor and editor for support and critical yet constructive encouragement
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Dolfsma, W., van der Velde, G. Industry innovativeness, firm size, and entrepreneurship: Schumpeter Mark III?. J Evol Econ 24, 713–736 (2014). https://doi.org/10.1007/s00191-014-0352-x
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00191-014-0352-x
Keywords
- Entrepreneurship
- Innovation
- Industry innovativeness
- Industry dynamics
- Firm entry
- Small firms
- Large firms
- New-product announcements
- Schumpeter Mark III