Recent research: Does larger size make a firm more innovative?

Conventional TBED wisdom for decades has been that small businesses generate more innovation in the United States. All big tech companies started as scrappy little companies in their respective eras of IT’s rapid growth. But there remains a long-running debate about whether large firms with financial resources and R&D capacity have an innovation advantage over smaller but more agile firms. Understanding the arguments for each side is important for policymakers and business leaders as they seek ways to support small and medium-sized enterprises and leverage the innovative capacity of larger corporations. In their paper, Firm Size and Innovative Performance: A Meta-Analysis Across 25 Years of Evidence, Federico Bachmann and Rodrigo Ezequiel Kataishi provide a comprehensive meta-analysis that synthesizes 25 years of research to clarify this relationship.  

Overall, Bachman and Kataishi confirm a positive relationship between firm size and innovative performance. Larger firms tend to innovate more, primarily because of their superior resources, ability to spread R&D costs, attract skilled talent, and leverage complementary assets like distribution networks. However, their findings also show that when measured by outputs (new products, innovation, or sales), the size advantage is weaker. This difference suggests that while large firms invest more, smaller firms may convert investments into marketable innovations more efficiently. They also suggest that small firms show greater strength in radical product innovation and targeted markets that are perhaps of less interest to larger firms. Another interesting finding is that among firms that are already innovative, the effect of size diminishes. That is, once innovation routines are established, organizational processes and learning matter more than sheer scale.  

The implication for policymakers is that there is not a single answer to the question. Effective innovation policy should support both large enterprises and small firms in ways that play to their respective strengths and opportunities to collaborate. While large firms generally innovate more, small firms play an important role in high-impact specialized innovation. Therefore, policies should balance support for both groups by encouraging scale where appropriate, while also fostering flexibility and experimentation among smaller firms. Policies should not just encourage investment in R&D but also commercialization and diffusion of innovations. And, since the importance of firm size diminishes once firms develop innovation routines, policies that strengthen collaborative networks and learning processes may be more effective than those that simply favor large firms. Both small and large firms may benefit from policies that encourage collaboration, such as supply-chain innovation programs, cluster initiatives, and open innovation platforms.

The researchers’ approach

The authors use meta-regression analysis to systematically review 95 quantitative studies published between 1993 and 2017. Only studies that employed econometric models at the firm level and examined innovative performance (IP) in relation to firm size were included. Their method allowed for the standardization of results across studies, allowing them to compare size effects from studies that used different measurements, such as R&D expenditures, patents, or sales figures. Using this method, they can include work that demonstrates the advantages of larger firms (Damanpour, 2010, British Journal of Management), as well as studies showing that some smaller firms innovate more rapidly, especially in niche markets or with more radical innovations (Laforet, 2013, Journal of World Business). They also controlled for differences in industry sectors, firm types, and whether firms were in developed or developing countries.  

This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.