Small Firms Play No Small Role in Innovation Economy

Small firms, as much as large ones, may be key to the nation's ability to innovate, particularly in emerging fields, according to data published by the U.S. Small Business Administration (SBA). A report released earlier this year by SBA's Office of Advocacy shows that large firms in the biotechnology, medical electronics, semiconductor, and telecommunications industries are citing patents by small firms in higher-than-expected numbers.

The report, Small Firms and Technology: Acquisitions, Inventor Movement, and Technology Transfer, examines small firms' contribution to the innovation process through acquisition by larger firms and the hiring of elite inventors. Also considered is large firms' dependence on small firm technology through patent citations. The report's conclusions are drawn from two 1,000-plus databases of company patent activity from 1996 to 2000 and from 1998 to 2002.

Small businesses represent a growing share of the country's highly innovative firms (defined as those with 15 or more patents during either of the two study periods), increasing from 33 percent of the pool in 2000 to 40 percent in 2002. Small businesses also represented 65 percent of the new companies in the report's list of most highly innovative companies in 2002.

Small firms' contributions to technological innovations are best measured industry-by-industry, the report finds. Their importance is not immediately apparent when viewed in the aggregate, because small firms tend to be excluded from some key capital-intensive industries. The report cites examples such as the automotive, aerospace and oil research industries. The story becomes quite different for the emerging research and technology-intensive fields, however.

In biotechnology, small firm research and technologies are said to be used by large firms at a rate 60 percent higher than expected, and 41 percent of all biotech patent citations go to small firms. In fact, 66 percent of citations from large biotech company patents and 79 percent of small company patents are associated with the earlier work of small firms. This finding conforms well with the generally held notion that small firms lead the creation and technological growth of emerging industries before larger firms take on dominant roles through consolidations, mergers and acquisitions.

In terms of inventor movement, small company offices proved to be an attractive venue for elite inventors previously involved in the public sector. Those working for public sector organizations were 10 percent more likely to relocate to small firms than the researchers expected, based on estimates of all inventor migrations. However, large firms more than small ones demonstrated the greater likelihood to retain elite inventors, with nearly 75 percent of large firm inventors staying vs. about half for small firms and the public sector.

The study also finds larger firms are more likely to use the patents and technologies generated by small firms than acquire the firms in their entirety. In fact, based on a sampling of 43 acquisitions between 1994-1998, only a small number involved large firms buying small ones. The balance of the study group were mostly large firm acquisitions by even larger ones. This finding somewhat contradicts conventional wisdom that large firms gain their technology strength by gobbling up smaller, more innovative companies.

The SBA Office of Advocacy independently represents the views of small business to federal agencies, Congress, and the President. To obtain a copy of this report, visit http://www.sba.gov/advo.