6 The Myth of the Genius in the Garage: Big Innovation

The most celebrated commercial of the information age is “1984,” the ad that introduced the Apple Macintosh computer in its only airing on January 22, 1984, during the Super Bowl. Filmed by the director Ridley Scott, the ad begins with scenes that evoke dystopian science fiction, such as George Orwell’s novel 1984 and Fritz Lang’s movie Metropolis. As uniformed workers march through tunnels, a female sprinter in full color, chased by police, runs up to a giant screen depicting a droning black and white Big Brother figure and shatters the screen by hurling a hammer at it. Next a voiceover narrates scrolling text: “On January 24th, Apple Computer will introduce Macintosh. And you’ll see why 1984 won’t be like ‘1984.’”

The advertisement captured the Zeitgeist of the early information age. Drawing on the cultural revolution of the 1960s and the suspicion of authority that spread in the 1970s, “1984” symbolized what many saw as a break between the old, dying industrial era dominated by big corporations and big government and a postindustrial, libertarian new age that would blend the individualism of the Age of Aquarius with up-to-date technology such as the personal computer (PC). As Stewart Brand, creator of the Whole Earth Catalog, wrote, “Technology was a tool for expression. It expanded the boundaries of creativity and, like drugs and rock, could be rebellious and socially transforming.”¹ And unlike the managers of the old-line industrial corporations, emerging tech entrepreneurs such as Steve Jobs of Apple and Bill Gates of Microsoft became culture heroes.

A third of a century has passed since “1984” startled American television viewers. In that time, startups such as Apple and Microsoft, and newer companies such as Google and Facebook, have grown into corporate giants themselves, most of them run by professional managers. From today’s perspective it is clear that there was no transition from an industrial, corporate economy to a postindustrial, entrepreneurial economy, only from one kind of industrial corporate economy to another. Far from replacing the centralized firms of the smokestack era with a decentralized landscape of “electronic cottages” inhabited by burgeoning numbers of the self-employed, the information age has witnessed the development of global corporations and supply chains of unprecedented scale—and the continuing decline of self-employment in the United States and similar economies.

Most of all, today’s perspective allows us to see that the origin myth of the information age—the overthrow of sclerotic, hide-bound, giant corporations by scrappy, brilliant tinkerers building the future in their garages—is just a myth. Steve Jobs, Bill Gates, and others deserve credit for their brilliant success in commercializing new technologies. But most of those technologies had been invented in the laboratories of giant corporations, many of them working for the US military or civilian federal agencies on contract. The tech revolution of our time owes far more to teams of scientists and engineers working in well-funded corporate labs than to college dropouts tinkering in garages.

From the Alto to the Apple Macintosh

Before there was the Apple Macintosh, there was the Alto. And before there was Apple, there was Xerox PARC. On March 1, 1973, the first Xerox Alto was unveiled. The Alto was the first PC to combine a graphical user interface with a handheld mouse and other features that became standard elements of PCs a decade later. By the end of the decade, roughly 1,500 Altos were in use.

In 1976, Steve Jobs and Steve Wozniak cofounded Apple computer, a venture that grew out of the Homebrew Computer Club, a group of computer hobbyists that met in Silicon Valley. Initially Apple sold PCs named Apple I and Apple II. A key moment in the history of the young company came in 1979, when the twenty-four-year-old Jobs persuaded Xerox to allow Apple staff to tour the Xerox PARC facility in Silicon Valley in return for Xerox’s acquisition of stock in Apple. Taking part in the second tour, Jobs was reportedly amazed by the Alto, seeing the commercial potential of the device. According to Larry Tesler, a Xerox engineer who demonstrated the use of the new “windows” and other features of the Alto, “He was very excited. Then, when he began seeing the things I could do onscreen, he watched for about a minute and started jumping around the room, shouting, ‘Why aren’t you doing anything with this? This is the greatest thing. This is revolutionary!’”²

In 1981 Xerox brought out a version of the Alto called the Xerox Star, but the concepts pioneered by Xerox and others were commercialized best by Apple, which released the first Macintosh PC in 1984, following the poor sales of the Apple Lisa, which came out in 1983. And just as the Apple Mac was inspired in part by the Xerox Alto, so the Apple LaserWriter drew on the laser printer technology developed by Xerox.

It would be wrong to accuse Apple of simply copying ideas from PARC. Even before the PARC visit, the designers of the Macintosh intended it to include a number of features, such as bitmapped screens, that later appeared in the Mac. Furthermore, Apple modified the pioneering design of the Alto in numerous ways that made the Macintosh both cheaper and easier to use. And, of course, Apple also pursued a business and marketing strategy that proved to be more successful than those of its rivals, including Xerox, which was hamstrung by unimaginative management that failed to see the commercial potential in these innovations. In the late 1970s and early 1980s, Apple promoted its computers through computer stores, magazines, and schools and encouraged software developers to write their own programs.

Xerox PARC itself developed concepts that originated at other institutions. One was the Augmentation Research Center (ARC) of the Stanford Research Institute (SRI). ARC’s founder, Douglas Engelbart, was a radar technician serving in the US Army when he read an essay that changed his life, “As We May Think,” by Vannevar Bush, published in the Atlantic in July 1945.³ At the time Bush was the director of the federal Office of Scientific Research and Development, and played a critical role in developing the atomic bomb.

Bush envisioned a device he called the Memex that would permit individuals to share text and pictures and serve as the basis for a collective memory. Following the war, Engelbart graduated with a Ph.D. in engineering and joined SRI in 1957. In 1962 he published an essay titled “Augmenting Human Intellect: A Conceptual Framework.” With funding from the Defense Advanced Research Projects Agency (DARPA), Engelbart created his own lab at SRI, the ARC, to develop what he called the oN-Line System (NLS).

Engelbart showcased his lab’s work at what is now called “the Mother of All Demos,” a presentation at a San Francisco conference of the Association for Computing Machinery/Institute of Electrical and Electronics Engineers (ACM/IEEE) on December 9, 1968. In ninety minutes Engelbart and his colleagues, including some at remote sites communicating by wireless technology, demonstrated many of the features of what became the PC: the mouse, windows, graphics, hypertext, and even video conferencing. Vannevar Bush’s dream of the Memex had been realized.⁴

When Xerox founded PARC in 1970, the lab hired veterans of ARC. The first director of the PARC Computer Sciences Division was Robert Taylor, who as the director of the Information Processing Techniques Office of DARPA had funded Engelbart’s work at ARC. Taylor hired engineers and scientists from the DARPA and ARC networks.⁵ In turn, many PARC veterans went on to play leading roles in Silicon Valley in the late twentieth century.

The history of the tech industry provides many other examples of giant firms and corporate research labs responsible for breakthroughs that were developed and commercialized by others—including veterans of the same institutions. For example, after presiding over the development of the transistor at AT&T’s Bell Labs, William Shockley in 1957 founded his own semiconductor company in Mountain View, California, called Shockley Semiconductor Laboratories. Rebelling against his authoritarian style, eight of the young technicians he had recruited—the “traitorous eight”—quit and formed their own company, Fairchild Semiconductor. Fairchild produced spin-offs, including Intel, which became known as “Fairchildren.” One of the eight was Gordon Moore, who became a cofounder of Intel and is best known for Moore’s law, which predicted the regular doubling of the number of transistors per integrated circuit. Another, Eugene Kleiner, cofounded the Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers, which made early investments in such companies as AOL, Amazon, Google, Netscape, and Sun Microsystems.⁶

If Silicon Valley has a birthplace, it is 367 Addison Avenue, Palo Alto, California. In 1939 this bungalow was home to two young electrical engineers, both graduates of Stanford, Dave Packard and Bill Hewlett, when they founded the partnership Hewlett-Packard (HP). In the garage they assembled their first products, audio oscillators, selling eight to Walt Disney Studios to test sound systems in movie theaters scheduled to run the first stereophonic movie, Fantasia. But it was World War II that gave HP a real boost, as it produced radio, radar, sonar, and other supplies for the US military. After incorporating in 1947, HP became the world’s largest producer of electronic measuring devices, as well as a major producer of computers, calculators, and printers.⁷

But there was more to the success of HP than the genius of two young electrical engineers with access to a garage. The historical marker at the HP Garage makes this clear. Under the heading “Birthplace of Silicon Valley” the historical marker reads:

This garage is the birthplace of the world’s first high-technology region, “Silicon Valley.” The idea for such a region originated with Dr. Frederick Terman, a Stanford University professor who encouraged his students to start up their own electronics companies in the area instead of joining established firms in the East. The first two students to follow his advice were William R. Hewlett and David Packard.

Writing in the Harvard Business Review, Gary P. Pisano and Willy C. Shih coined the term “the industrial commons” for an industry-specific network that can include, among other things, “R&D know-how, advanced process development and engineering, and manufacturing competencies related to a specific technology.”⁸ Long before it had a name, an industrial commons existed in Silicon Valley based on productive interactions among startups, big firms, university research departments, government agencies, and venture capitalists.

To be sure, the “innovation in a garage” story is partly right. Startups do play an important role in innovation, particularly early in the emergence of whole new technologies. But the story and its proponents assume that startups are the source of virtually all innovations and moreover that a startup can no longer be innovative once it gets big. In this perspective, while HP might have developed some important innovations in the 1930s and 1940s, or Apple in the 1980s and 1990s, by the time these firms become giants they had to have lost most of their ability to innovate and become dependent on new garage innovators, which they simply bought up. As we will see, this is just plain wrong.

Firm Size and Innovation

Economists have studied the relationship between firm size and innovation for over a century. Joseph A. Schumpeter’s 1911 book, The Theory of Economic Development, focused on the entrepreneur as the driving force for innovation. He wrote, “The typical entrepreneur is more self-centered than other types, because he relies less than they do on tradition and connection and because his characteristic task … consists precisely in breaking up old, and creating new, tradition.”⁹

But writing thirty years later, after the emergence of dedicated corporate research labs and what Alfred Chandler called the “managerial corporation,” Schumpeter viewed the large corporation as central to innovation. In Capitalism, Socialism, and Democracy, first published in 1942 he said, “Technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required and make it work in predictable ways.”¹⁰ He went on to observe that innovation by individual inventors and entrepreneurs “is already losing importance and is bound to lose it at an accelerating rate. … Innovation itself is being reduced to routine. Technological progress is increasingly becoming the work of trained specialists who turn out what is required to make it work in predictable ways.”¹¹ Schumpeter argued that by focusing on price gouging by monopolies, traditional economists ignored the case of the innovative firm, which could recoup spending on R&D by using its market power to charge a price higher than marginal cost. According to Schumpeter, “There cannot be any reasonable doubt that under the conditions of our epoch such superiority is as a matter of fact the outstanding feature of the typical large-scale unit of control.”¹²

In 1952 John Kenneth Galbraith agreed with Schumpeter, with whom he had studied at Harvard. Writing in American Capitalism, he said, “The modern industry of a few large firms is an excellent instrument for inducing technical change. It is admirably equipped for financing technical development and for putting it into use. The competition of the competitive world, by contrast, almost completely precludes technical development.”¹³ Among leading contemporary economists, William J. Baumol emphasized the extent to which competition among oligopolistic firms based on innovation, not prices, is the major driver of technological progress. He compared this oligopolistic competition to an arms race “that participants cannot easily quit.”¹⁴

In contrast to the crude simplicities of Econ 101, in which competition among numerous small firms in conditions of technological stasis drives down prices for consumers, in what might be called Econ 201, or modern industrial economics, competition among a small number of large firms drives technological innovation. History does not bear out the claim that large, oligopolistic corporations are inevitably less dynamic and innovative than small firms. On the contrary, as Joseph Bowring has written, “Core firms are not pitiful, helpless giants fated to topple and rot into … senescence; their competitive advantages have made them virtually indestructible.”¹⁵

For more than a century, then, a rich body of academic economic and historical scholarship has treated oligopolistic competition among large firms in imperfectly competitive markets as the norm in modern industrial economies. And yet this scholarship is all but unknown to policy makers and the educated public. The fault lies largely with the mathematical turn taken by neoclassical economics departments in the second half of the twentieth century. In 1939 John Hicks, one of the founders of modern mathematical economics, observed that it was difficult if not impossible to produce elegant mathematical models of oligopolistic markets:

If we assume that the typical firm (at least in industries where the economies of large scale are important) has some influence over the price at which it sells … [it] is therefore to some extent a monopolist. … Yet it has to be recognized that a general abandonment of the assumption of perfect competition, a universal adoption of the assumption of monopoly, must have very destructive consequences for economic theory.

Faced with a choice between complex reality and elegant equations that assumed competitive equilibrium, Hicks advised the academic economics profession to ignore reality in order to save the equations:

It is, I believe, only possible to save anything from this wreck—and it must be remembered that the threatened wreckage is the greater part of general equilibrium theory—if we can assume that the markets confronting most of the firms with which we shall be dealing do not differ very greatly from perfectly competitive markets. … We must be aware, however, that we are taking a dangerous step, and probably limiting to a serious extent the problems with which our subsequent analysis will be fitted to deal.¹⁶

The academic economics discipline has largely taken Hicks’s advice. Galbraith compared the emphasis of academic neoclassical economics on small firms in competitive markets to a

description of the United States which, by assuming away New York, Chicago, Los Angeles and all other communities larger than Cedar Rapids, was then able to describe the country as essentially a small-town, front-porch community. Only an assumption very important to economics, as it is conventionally taught, would justify such a questionable defense.¹⁷

Galbraith noted the mystical American belief in competitive markets: “For competition, with us, is more than a technical concept. It is also a symbol of all that is good. We wouldn’t survive under a regime of competition of classical purity—with an economy rigorously so characterized we should have succumbed not to Hitler but to Wilhelm II—but we must still worship at its throne.”¹⁸

Schumpeter’s argument that firms with temporary monopolies would have both the resources and the incentive to innovate was challenged by the economist Kenneth J. Arrow, who argued that innovation would be greater in more competitive markets.¹⁹ But as the Obama Council of Economic Advisers reported, “Allowing firms to exercise the market power they have acquired legitimately can maintain incentives for research and development, new product introduction, productivity gains, and entry into new markets, all of which promote long term economic growth.”²⁰

The Rise and Fall of the Corporate Research Lab

Ironically, neoclassical economics predicts that in a truly competitive economy there would be little or no R&D. It is much cheaper for companies to copy another firm’s innovations than to invest in expensive innovation. In other words, the company that chooses to fund breakthrough R&D cannot be certain it will recoup enough of the gains from its initial investment if other companies can copy it through reverse engineering and other means. So in a completely competitive and free market with no patent and other intellectual property protection it is quite possible that no companies would spend money on risky long-term innovation, in part because profit rates would be at the cost of capital, leaving little or no resources to invest in R&D.

History bears out what economic theory predicts. Modern economic progress depends largely on the commercialization of technological innovation that originates in systematic early-stage research. Since the nineteenth century, early-stage research has been undertaken chiefly by three types of institutions—research universities, government labs, and corporate research labs—and funded by two main sources—government spending and corporate profits. And in the last half century some high-tech startups, funded by venture capital, have played a key role as well.

This approach to technological innovation was pioneered in the late nineteenth century by imperial Germany. The modern research university in the United States, starting with Johns Hopkins and then others, is modeled on imperial German precedents. Indeed, two universities founded as research universities along German lines, MIT and Stanford, have played a disproportionate role in technological progress. With its Kaiser Wilhelm Institutes, imperial Germany also pioneered the government research laboratory, which in the United States includes laboratories associated with the Department of Energy and the Department of Defense, among others. After the Civil War, the United States pioneered the state technical universities (e.g., North Carolina State University, Ohio State University), most of which were established by federal land grant funds.

Corporate research labs were also pioneered by the German chemical industry in the late nineteenth century and soon copied by many nations in the first half of the twentieth century. Throughout the twentieth century, most of the breakthrough technological innovations in the private sector originated with companies that were funded by government either directly or indirectly (through tax incentives, grants, or contracts) or with companies that enjoyed some modicum of market power. IBM’s development of much early computer technology with Department of Defense funding is an example of the former. Bell Laboratories benefited from the legal monopoly in the United States held by its parent company, AT&T.

However, it was not until the 1920s and 1930s that the main sources of innovation in the United States changed from being based largely on technical tinkering and trial and error by mechanics and inventors to a science-based approach in which innovation followed from a more fundamental understanding of underlying processes. Since then the research labs of large corporations, sometimes supported by the federal government, have become the major source of technological innovation.

With the growth of a more formal, laboratory-based system of R&D, R&D expenditures and the number of scientists and engineers employed in industrial research exploded. Growing by 300 percent between 1921 and 1938, industrial research was one of the largest forty-five occupations by employment in 1937. Industrial laboratories increased from fewer than 300 in 1920 to more than 2,200 in 1938 to almost 5,000 in 1956, with many, like Bell Labs, conducting extensive basic research. At the same time, annual expenditures on industrial research ballooned from $25 million to $175 million.²¹

As a result, the locus of innovation switched from individual inventors tinkering, like Edison and Bell, in their garages to scientists working in corporate labs. Reflecting this switch was the distribution of patents: in 1901, 20,896 patents were issued to individuals in the United States, and only 4,650 went to corporations. The proportions were more even in the 1930s, but in 1953 individual inventors received only 40 percent of patents, and of the 60 percent of patents that went to firms, two-thirds originated with a company’s research personnel.²² By 1980 corporations were obtaining about five times more patents than individuals. As a result, in the mid-twentieth century, a few large corporations dominated private R&D. In 1974, 126 companies with more than 25,000 employees performed three quarters of all industrial research; of these companies, four were responsible for 19 percent of industrial R&D.²³

Big companies were responsible for major technology breakthroughs. Synthetic materials derived from hydrocarbons became the foundation of new products and industries. Standard Oil of New Jersey led the way in developing synthetic rubber during World War II, and seemingly miraculous new materials flowed from the corporate laboratories of giant firms like DuPont and Dow: nylon, polyester, Formica, latex paint, Kevlar armor, Fiberglas, Lucite, Plexiglas. In the private sector, only immense corporations with steady profits that went in part to fund cutting-edge research could have made and commercialized these discoveries. Henry Kressel and Thomas Lento have described the importance of corporate laboratories in the genesis of the information and communications technologies (ICT) revolution:

For example, the UNIX operating system and its offshoots and the software languages C and C++ were developed at Bell Labs in Murray Hill, New Jersey. Relational databases and reduced instruction set computers were invented at IBM Yorktown Labs, New York. Semiconductor devices and integrated circuit manufacturing were developed at Bell Labs, Western Electric, and RCA Labs (later Sarnoff Corporation).²⁴

As Michael Mandel has observed, most Nobel Prize winners in science and technology have worked for universities and very large corporations. The last time the founder of a startup won a Nobel Prize (in physics) was in 1909; the prize went to Guglielmo Marconi, the pioneer of radio. Since then, two colossal corporations, AT&T and IBM, have won all the Nobel Prizes awarded to companies.²⁵

The Decline and Fall of the Corporate Research Lab

As the historian Eric Hobsbawn has written, “It is often assumed that an economy of private enterprise has an automatic bias towards innovation, but this is not so. It has a bias only towards profit.”²⁶ This view is borne out by the shift by many US corporations in recent decades from early-stage research to later-stage, more incremental development and, for some, to various forms of financial engineering, which can yield higher short-term profits. Among the casualties of this shift has been the classic corporate research lab.

Increased competitive pressures have led to less corporate expenditure on basic and applied research (as opposed to product and process development), exactly as economic theory would predict. As one MIT study found, more competition, including from low-wage, mercantilist nations such as China, reduced US business R&D expenditures.²⁷ Couple that with pressure from Wall Street to focus on short-term profits, not long-term breakthroughs whose benefits, however useful for society, are not always captured by the business making the investment, and we see a shift away from what Clayton Christensen calls disruptive innovation to safer sustaining innovation. One of the few exceptions to the trend of declining corporate R&D expenditure on basic science is found in the pharmaceutical industry, for the simple reason that their future is impossible without new drugs, which require early-stage research (patent protections also give pharmaceutical companies some chance to recoup the costs of expensive R&D). As in-house corporate laboratories have declined in importance, large firms in many industries have adopted the model of partnering with or acquiring small startups.²⁸

As a share of revenue, US corporate R&D has remained relatively steady, falling just slightly since 2000. But because the economy is getting more innovation-based and the United States should be specializing even more in innovation as globalization deepens, one would have expected corporate R&D to increase as a share of GDP. Moreover, Ashish Arora, Sharon Belenzon, and Andrea Patacconi observed that the number of publicly traded companies whose researchers published in scientific journals had declined by two-thirds to a mere 6 percent between 1980 and 2015.²⁹ The authors concluded, “Large firms appear to value the golden eggs of science (as reflected in patents) but not the golden goose itself (scientific capabilities).”³⁰ According to them, firms that engage in more research have lower stock values.³¹

Under pressure from shareholders, many firms have eliminated or spun off their research efforts. Under pressure from the activist investor Nelson Peltz, for example, DuPont merged with Dow and cut R&D.³² Bell Labs virtually disappeared after AT&T spun it off after AT&T was broken up. In 2002 Xerox PARC became an independent subsidiary that has replaced basic R&D with research on demand for clients. IBM Research still exists, and has produced major innovations such as the artificial intelligence system Watson, but even it faces pressures as IBM revenues and profits decline.³³ Apparent exceptions to the trend prove the rule. Because Microsoft was somewhat insulated from competitive pressures, it was able to invest $6 billion to $12 billion per year in R&D from 2002 to 2016.³⁴ The fact that Google is a closely held corporation insulated from shareholder pressure with robust profits may explain its willingness to engage in “moonshot” projects, such as self-driving cars. Although even Google appears to have cut back on some of these projects with longer and more speculative outcomes.

While firms may do less basic and early stage applied research than in the past, they continue to fund R&D, with the largest global corporations leading the way. According to Peter Nolan, Jin Zhang, and Chunhang Liu, “The increased focus on core business among the world’s leading systems integrators and subsystems integrators has enhanced the efficiency of R&D expenditure, allowing benefits from economies of scale and scope.”³⁵

A New Age of the Individual Entrepreneur?

The decline of the classic mid-twentieth-century corporate research lab is one factor in the contemporary revival of small-is-beautiful thinking in the area of innovation. Another is the association of innovation in the popular mind and the media with a few entrepreneurs in the tech sector, such as Steve Jobs and Mark Zuckerberg. Because of this, in the last couple of decades there has been ongoing debate over which Joseph Schumpeter was correct about innovation—Schumpeter I, who ascribed innovation to individuals, or Schumpeter II, who believed that the future of innovation lay with the research teams of “trustified” capitalism.

When Schumpeter published The Theory of Economic Development in 1911 (Schumpeter I), individual entrepreneurs such as Thomas Edison, Andrew Carnegie, and John D. Rockefeller were the drivers of innovation and growth. But when he wrote Capitalism, Socialism, and Democracy in 1942 (Schumpeter II), it was large managerial corporations such as ATT, GM and DuPont with dedicated R&D labs that drove innovation. This change over time does much to explain the evolution of his views on the firm size sources of innovation.

In other words, the relative importance of small and large firms in innovation is time dependent. One reason why there was a revival of Schumpeter I theories after the late 1980s was that as the IT revolution took off, it enabled a swarm of entrepreneurs—people like Michael Dell, Larry Ellison, Bill Gates, or Steve Jobs—to strike out and form new companies. But as the technology has matured there has been shaking out and consolidation, to the point that the balance has shifted back toward the large firm. This is why by the mid-2000s only about 7 percent of new company startups in the United States were in high-tech industries and only about 3 percent of business founders considered their new businesses to be “technologically sophisticated.”³⁶

But with the cutbacks in corporate funding for earlier-stage, more risky research and the seeming flowering of small, innovative startups, is it still true that big firms are innovative? The dominant narrative would suggest no: these corporate giants have become sluggish, risk-averse copiers. The entrepreneur Sam Hogg speaks for most when he writes, “Startups require innovative entrepreneurs, and that typically isn't in a job description for a large company. Big companies hire people when the workload demands it, not when they can come up for air and think about innovation.”³⁷

But this narrative, as widely touted as it is, is not true. Scholarly research shows that large corporations continue to play a leading role in innovation. To be sure, some research has found that some small businesses are more innovative per dollar of revenue than large firms. A Small Business Administration (SBA)–funded study found that “small businesses develop more patents per employee than larger businesses, with the smallest firms, those with fewer than 25 employees, producing the greatest number of patents per employee.”³⁸ Another study found that “small patenting firms are roughly 13 times more innovative per employee than large patenting firms.”³⁹ Still another found that “small firms with at most 290 employees obtained on average 1.2626 patent citations per dollar of R&D stock, while large firms obtained 0.5712; thus, small firms obtained on average 2.2104 times more citations per dollar of R&D stock than large firms.”⁴⁰

But studies claiming to find that small firms are more innovative are actually looking at a small subset of firms. Among firms that obtain patents, small businesses do produce more patents per employee than large firms. But that doesn’t stop the SBA from misleadingly stating that small firms produce thirteen times more patents per employee than large firms.⁴¹ Note the omission of the word “patenting” before the words “small business.” Also note that the top 1.5 percent of patenting firms, all large firms, are responsible for 48 percent of all patents from 1999 to 2008. In 2011, 108,626 utility patents of US origin were granted. Just fifty US companies getting the most patents (all large corporations) were responsible for over 30 percent of these patents. The reality is, only a tiny fraction of the nation’s 6 million small firms patent or innovate.⁴² This is not to say that some small technology-based firms are not highly innovative. But to assume that small always equates with innovative or entrepreneurial is not accurate.

One reason for this poor performance is that very few new businesses have any intention or capability to innovate. As Scott Shane writes,

Most new businesses don’t intend to do something innovative enough to alter the market they are in. Data from the Entrepreneurship in the United States Assessment indicates that only 2 percent of new business founders expect their new companies to have a substantive effect on the markets in which they operate, and 91 percent expect to have little or no impact on those markets.⁴³

Shane goes on to note that

almost all new businesses produce the same products and services as existing businesses, and almost none of them provide a product or service that their founder views as unique. Even among some of the best start-ups—the Inc. 500 firms, which are the fastest growing private companies in the United States—only 10 percent offer a product or service that other companies do not offer.⁴⁴

Another study found that

within the first four years of business, only 2.7 percent of the businesses in the sample had already applied or were in the process of applying for patents. Copyright and trademark usage is slightly higher but still most firms do not innovate at least according to these crude observable measures. … Nearly 85 percent of small businesses did not acquire a patent, trademark or copyright during their first four years of existence.⁴⁵

This study also found that just between 6 and 8 percent of new businesses had developed any proprietary business practices or technology during their first few years of business.⁴⁶

Studies touting the superiority of small firms thus need to be interpreted with care. First, while small technology companies in some industries may be more innovative dollar for dollar than large firms, the real question is the share they contribute to overall innovation. On this measure, it is small. For example, one study found that while small technology firms patent more per employee than large firms, they were responsible for just 6.5 percent of patents from 2002 to 2006.⁴⁷ In other words, while small technology firms may be more efficient at innovation, collectively they do much less of it than large firms. In fact, one firm, IBM, received more patents than all the 504 small firms in the study combined. When looking at small firms that had received more than 15 patents in five years Nolan and coworkers found that a number of firms fell out of the database. Six percent of small firms became large firms, while 17 percent had merged or been acquired. Most of the remaining small firms that dropped out did so because they fell below the fifteen-patent threshold, while another 4 percent dropped out because they became troubled or declared bankruptcy. Among the top 700 firms in 2003, the top seventeen were responsible for 25 percent of all R&D expenditures, the top thirty-three for 40 percent, and the top 300 for 80 percent.⁴⁸

Moreover, while small firms account for 49 percent of US employment, they account for just 16 percent of business spending on R&D, while firms of more than 25,000 workers account for 36 percent (see figure 6.1).⁴⁹ Likewise, they account for 18.8 percent of patents issued, while the largest firms account for 37.4 percent of patents.⁵⁰ Average R&D spending per worker increases with company size (not controlling for industry), with firms with five to ninety-nine workers spending around $790 per worker and large firms with 5,000 or more workers spending around $3,370 per worker.⁵¹

Figure 6.1 US Business R&D by Firm Size

Source: National Science Foundation, “Business Research and Development and Innovation: 2012,” NSF 16-301 (Arlington, VA: NSF, October 29, 2015) (Table 21. Percent of R&D by Firm Size), https://nsf.gov/statistics/2016/nsf16301/#chp2.

When Adams Nager and coworkers at the Information Technology and Innovation Foundation surveyed almost 1,000 US scientists and engineers involved in filing triadic patents (patents filed in the United States, Europe, and Japan), they found that approximately 75 percent of materials science and IT patents and 60 percent of life science patents were filed by firms with more than 500 employees.⁵² Countering the popular narrative that large firms are sluggish copiers and small firms the true innovators, small or medium-sized firms with 500 or fewer workers in the sample accounted for only around 30 percent of patents, yet they employed 48.4 percent of workers. As the innovation scholar Luc Soete has found, “Inventive activity seems to increase more than proportionately with firm size.”⁵³

Other research suggests that even among firms that patent, the assumption that small firms are more innovative is not that simple, in part because of the focus on patents as a measure of innovation. In a 1996 paper, Wesley M. Cohen and Steven Klepper found that R&D and firm size are closely related. In other words, large firms invest more in R&D as a share of sales.⁵⁴ Like other scholars, Cohen and Klepper found that the number of patents and innovations produced per R&D dollar declined with increasing firm size. But they argue that this is not due to inefficiency, bureaucracy, and lack of drive but rather reflects a mismeasurement of innovation outputs. Large firms engage in “cost spreading,” in which the benefits from one innovation are spread across more units and products, leading to a greater overall level of innovation per unit of R&D. They write, “Not only does cost spreading provide the basis for explaining the R&D-size relationship, it also challenges the consensus that has emerged from the R&D literature that large firm size imparts no advantage in R&D competition.”⁵⁵ Further, “By applying the fruits of their R&D over a larger level of output, larger firms not only have a greater incentive to undertake R&D than smaller firms but they also realize a greater return from their R&D than smaller firms.”⁵⁶

More recently, in 2016, business professors Anne Marie Knott and Carl Vieregger explain how previous studies got the data wrong.⁵⁷ Historically, innovation scholars have relied on product or patent counts as a proxy for innovation output. But doing so overemphasizes product innovation and underestimates process or incremental innovation—innovation activities that large firms engage in more but rarely involve a patent filing. But the recent development of the National Science Foundation’s Business Research and Development and Innovation Survey allowed them to better analyze incremental and process innovation. They estimate that a 10 percent increase in the number of employees increases R&D by 7.2 percent and that a 10 percent increase in firm revenues increases R&D productivity by 0.14 percent. Their conclusions show that large firms invest more in R&D activities and enjoy higher returns on innovation output per dollar invested in R&D.

One reason why some studies have found less R&D per employee or sales among large firms is that smaller firms are newer and are more R&D-focused because they are not producing as much. In other words, in young firms a larger share of the effort is devoted to developing a product because they don’t have a product. This is perhaps why a study of more than 1,000 European enterprises of all sizes from 2002 and 2005 found that after the age of the firms was controlled for, large firms were about 14 percent more likely to be involved in innovation (product and process) than small firms. And small firms that were young and middle-aged were two and a half to three times more likely than large firms not to be involved in any innovation.⁵⁸ These results held when a number of factors such as industry, country, and ownership type were controlled for.

This pattern has been found to be true in many nations. For example, as one study of innovation in Japan found, “Japanese SMEs [small and medium enterprises] spend comparatively little on innovation. While Japan as a whole spends a lot on R&D in comparison with other developed economies, its SMEs do not.”⁵⁹ Another study found that EU nations with smaller average firm size, such as Italy and Spain, have corporate R&D spending that is about half the EU level as a share of GDP. The authors conclude that “economies geared to small-scale production may be ill prepared to appropriate the full benefits of the current phase of massive and rapid technological change.”⁶⁰ OECD data on thirty-three nations that compared the percentage of large firms that introduced a new product to the percentage of small firms that did so found that in no nation were small firms more likely to introduce a new product. In fact, the advantage for large firms ranged from double in Australia to almost six times higher in Spain and Poland (see figure 6.2). This is one reason why a study of 1,053 enterprises from twenty-six countries in the years 2002 to 2005 found a positive and statistically significant relationship between firm size and innovation.⁶¹

Figure 6.2 Ratio of Share of Large Firms to Share of Small Firms Introducing New Products, 2010–2012

Source: OECD, OECD Science, Technology and Industry Scoreboard 2015: Innovation for Growth and Society (Paris: OECD Publishing, October 19, 2015) (Table 4.5.3. Firms Introducing Products New to the Market, by Firm Size, 2010–12, October 2015), http://dx.doi.org/10.1787/sti_scoreboard-2015-en.

Moreover, if startups are the driver of innovation, how do small business defenders explain that California and Massachusetts—home of Silicon Valley and Route 128, respectively—had below-average rates of new firm formation?⁶² As Shane writes, San Francisco and Boston metro areas “aren’t anywhere close to the number one metro area in terms of per capita firm formation; that honor goes to Laramie, Wyoming. San Francisco comes in at number 121 out of 394, with about 40 percent the per capita business formation rate of Laramie,” with San Jose coming in even lower at 165.⁶³

Another problem is that it is misleading to generalize about the relationship between firm size and innovation across industries. One 1987 study of four decades of innovation in the UK found a U-shaped pattern, with the greatest innovation carried out by the smallest and biggest firms.⁶⁴ But this ignores the unique characteristics of particular industrial sectors. As Giovanni Dosi and coworkers noted in 2011, “Innovative firms are likely to be rather small in industrial machinery; big firms prevail in chemicals, metal working, aerospace and electrical equipment, while many ‘science-based’ sectors (such as electronics and pharmaceuticals) tend to display a bimodal distribution with high rates of innovation of small and very large firms.”⁶⁵

Finally, one reason the research on firm size and innovation is somewhat ambiguous is that small firms play a more important role in some industries than in other industries, and at different times. In other words, a healthy innovation ecosystem depends on a mix of firm sizes. As Zoltan J. Acs and David B. Audretsch found in one of the definitive studies on the issue, “The greatest difference between the large- and small-firm innovation rates, implies that the correct answer is: It depends on the particular industry. For example, in the tire industry, the large-firm innovation rate exceeded the small-firm innovation rate by 8.46, or by 8 innovations per 1,000 employees.”⁶⁶ They found that in industries characterized by higher levels of capital intensity, “innovation tends to be greater in large firms than in small firms.”⁶⁷ For example, in the US electric utility industry most of the research is conducted by large generation companies, especially if they are part of a larger holding company.⁶⁸ Interestingly, electric utility R&D declined precipitously (by 78.6 percent) after US electricity markets were restructured to make them more competitive, more evidence of the inverted U-shape of innovation and competition (see chapter 11). An older (1974) study found that “larger pharmaceutical firms were ‘better’ at innovation than smaller firms.”⁶⁹ Likewise, a 1980 Federal Trade Commission report concluded: “It is questionable whether smaller firms could support an R&D program on a scale similar to that of General Electric. Without the support of a multiplant operation such as General Electric, it is doubtful that various large, specialized research programs on lamps and lighting would be undertaken in the private sector.”⁷⁰ We see this in agricultural biotechnology. As a report from the US Department of Agriculture notes, “In the crop seed and animal breeding sectors, the emergence of biotechnology was a major driver of consolidation. Companies sought to acquire relevant technological capacities and serve larger markets to share the large fixed costs associated with meeting regulatory approval for new biotechnology innovations.”⁷¹

Other research has found that “small firms prevail in the early stages and innovation tends to concentrate in larger firms as industries evolve towards maturity.”⁷² We saw this in the 1990s when many small firms emerged and competed to be the winners in IT. But only a few firms could emerge as winners, and the ones that did continued to invest in innovation to improve their products and services and gain advantage in related activities. The study concluded, “The question is no longer whether size positively or negatively affects innovation but under what circumstances may small firms enjoy an innovation advantage over large ones (and vice versa).”⁷³ This is why Frederic M. Scherer’s warning that “the search for a firm size uniquely and unambiguously for invention and innovation is misguided” is such good advice.⁷⁴

According to some, however, big firms are the natural enemies of small, innovative startups. Big companies, it is asserted, can present a take-it-or-leave-it ultimatum to smaller innovative firms: either merge with us or be destroyed. Barry C. Lynn writes, “In such an environment, independent firms find it ever harder to keep it that way; just ask the founders of Tom’s of Maine, Ben and Jerry’s, Niman Ranch, Honest Tea, or Stonyfield Farm, all of which have been forced to sell out to bigger companies.”⁷⁵

In at least one of these cases, Lynn is mistaken. When one of us asked Seth Goldman, the cofounder and “TeaEO” of Honest Tea, why he chose to partner with Coca-Cola, he said this:

Honest Tea was not “forced” to sell out to a big company. Rather, we chose to partner with Coca-Cola as a way to put our growth on a faster track. … It had taken us 10 years to get into 15,000 retail accounts, and we had sold a cumulative $120 million over those first ten years. In the next six years, we expanded into more than 100,000 accounts, and we sold a cumulative $880 million. So there were some powerful incentives (and rewards) for us to sell to Coke, but we certainly weren’t forced to do so. … Moreover, Honest Tea’s ability to raise capital from investors was dependent on the belief that at some point we would be able to sell to a larger company which would give a return to our investors. Now that I have the benefit of hindsight, I would not have chosen a different outcome for the brand.⁷⁶

In the case of Honest Tea, partnering with a large corporation allowed an innovative startup with deeply held progressive values and behaviors to get its healthy products in front of many times more American consumers. And it sent a clear message to other budding entrepreneurs: if you can succeed in building a successful company, you can put its growth on steroids by partnering with a larger company. This is something progressives should be cheering, not decrying.

In conclusion, it should be no surprise that despite the publicity that rewards the rare successful tech startup, most small businesses are not innovative. Few of them want to be. In a 2011 study, Erik Hurst and Benjamin Wild Pugsley found that most small businesses do not intend to grow or innovate.⁷⁷ Most small business owners cited nonpecuniary reasons, such as being their own bosses or having flexible schedules, as their motives for starting a company; only 41 percent had a new business idea or sought to create a new product.⁷⁸ Only 15 percent of new businesses surveyed planned “to develop proprietary technology, processes, or procedures in the future.”⁷⁹ This is not to say that tech startups and small R&D-intensive firms are not important to driving innovation, but to privilege small over large when it comes to innovation is a fundamental mistake.

Notes

1. Quoted in Walter Isaacson, “Stewart Brand Responds,” Medium, December 27, 2013, https://medium.com/@walterisaacson/stewart-brand-responds-f857b2e8da26.

2. Quoted in Malcolm Gladwell, “Creation Myth: Xerox PARC, Apple, and the Truth about Innovation,” New Yorker, May 16, 2011, http://www.newyorker.com/magazine/2011/05/16/creation-myth.

3. Vannevar Bush, “As We May Think,” Atlantic Monthly, July 1945.

4. Dylan Tweney, “Dec. 9, 1968: The Mother of All Demos,” Wired, December 9, 2010.

5. “The Xerox PARC Visit,” in Making the Macintosh: Technology and Culture in Silicon Valley, Stanford University, web.stanford.edu.

6. Chris Nuttall, “Silicon Valley’s Founding Fathers,” Financial Times, October 30, 2007.

7. Benjamin Pimentel, “High Tech’s Lowly Birthplace,” SFGATE, November 27, 2005.

8. Gary P. Pisano and Willy C. Shih, “Restoring American Competitiveness,” Harvard Business Review, July/August 2009, https://hbr.org/2009/07/restoring-american-competitiveness.

9. Joseph A. Schumpeter, The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934 [1911]), 91.

10. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper & Brothers, 1950 [1942]).

11. Ibid., 132.

12. Ibid., 100–101.

13. John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power (New York: Houghton Mifflin, 1952), 91.

14. William J. Baumol, The Free-Market Innovation Machine (Princeton, NJ: Princeton University Press, 2002), 287.

15. Joseph Bowring, Competition in a Dual Economy (Princeton, NJ: Princeton University Press, 1986), 11.

16. J. R. Hicks, Value and Capital (Oxford: Oxford University Press, 1946), 83–84, cited in John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna, “Monopoly and Competition in Twenty-First Century Capitalism,” Monthly Review 62, no. 11 (April 2011), https://monthlyreview.org/2011/04/01/monopoly-and-competition-in-twenty-first-century-capitalism.

17. John Kenneth Galbraith, The New Industrial State, 4th ed. (Princeton, NJ: Princeton University Press, 2007), 746.

18. Galbraith, American Capitalism, 85.

19. Kenneth J. Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in Essays in the Theory of Risk-Bearing, ed. Kenneth J. Arrow (Amsterdam: North-Holland, 1971), 144–160.

20. White House, Council of Economic Advisers, “Benefits of Competition and Indicators of Market Power,” Council of Economic Advisors Issue Brief, ObamaWhiteHouseArchives.gov, May 2016, 3, https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160502_competition_issue_brief_updated_cea.pdf.

21. Ester Fano, “Technical Progress as a Destabilizing Factor and As an Agent of Recovery in the United States between the Two World Wars,” History and Technology 3 (1987): 262–263, http://www.tandfonline.com/doi/abs/10.1080/07341518708581671?journalCode=ghat20.

22. Zvi Griliches, “Recent Patent Trends and Puzzles,” Brookings Papers on Economic Activity (Washington, DC: Brookings Institution, 1989), 291–330, cited in Baumol, The Free-Market Innovation Machine, 34.

23. “Research and Development in Industry, 1974” (Washington, DC: National Science Foundation, September 1976), cited in Galbraith, The New Industrial State, 38–39.

24. Henry Kressel and Thomas V. Lento, Entrepreneurship in the Global Economy: Engine for Economic Growth (Cambridge: Cambridge University Press, 2012), 44.

25. Michael Mandel, “Scale and Innovation in Today’s Economy” (Washington, DC: Progressive Policy Institute, December 2011), 3.

26. Eric Hobsbawm, Industry and Empire: From 1750 to the Present Day (Harmondsworth: Penguin, 1969), 40.

27. David Autor, David Dorn, Gordon H. Hanson, Gary Pisan, and Pian Shu, “Foreign Competition and Domestic Innovation: Evidence from US Patents” (working paper, Department of Economics, Massachusetts Institute of Technology, November 2016), http://economics.mit.edu/files/11708.

28. Fred Block, “Swimming against the Current: The Rise of a Hidden Developmental State in the United States,” Politics & Society 36, no. 2 (2008): 169–206, See also Walter Powell, “The Capitalist Firm in the 21st Century: Emerging Patterns in Western Enterprise,” in The Twenty-First Century Firm: Changing Economic Organization in International Perspective, ed. Paul DiMaggio (Princeton, NJ: Princeton University Press, 2001), 35–68; and Raymond E. Miles, Grant Miles, and Charles C. Snow, Collaborative Entrepreneurship: How Communities of Networked Firms Use Continuous Innovation to Create Economic Wealth (Palo Alto, CA: Stanford University Press, 2005), 36, note 56.

29. Ashish Arora, Sharon Belenzon, and Andrea Patacconi, “Killing the Golden Goose? The Changing Nature of Corporate Research, 1980–2007” (faculty paper, Fuqua School of Business, Duke University, and Norwich Business School, University of East Anglia, January 9, 2015), https://faculty.fuqua.duke.edu/~sb135/bio/Science%201%2091%2015.pdf.

30. Ibid.

31. Cited in Chris Matthews, “The Death of American Research and Development,” Fortune, December 21, 2015, http://fortune.com/2015/12/21/death-american-research-and-development.

32. Bill George, “Dow-DuPont Raises Even More Concerns America Is Abandoning Corporate Research,” Fortune, December 12, 2015, http://fortune.com/2015/12/12/dow-dupont-corporate-research-america.

33. Moshe Y. Vardi, “The Rise and Fall of Industrial Research Labs,” Communications of the ACM 58, no. 1 (January 2015): 5, http://delivery.acm.org/10.1145/2690000/2687353/p5-vardi.pdf.

34. “Microsoft’s Expenditure on Research and Development from 2002 to 2016 (in Million US Dollars), Statista.com, n.d., https://www.statista.com/statistics/267806/expenditure-on-research-and-development-by-the-microsoft-corporation.

35. Peter Nolan, Jin Zhang, and Chunhang Liu, The Global Business Revolution and the Cascade Effect: Systems Integration in the Global Aerospace, Beverage and Retail Industries (New York: Palgrave Macmillan, 2007), 146.

36. Scott A. Shane, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By (New Haven, CT: Yale University Press, 2008), 30.

37. Sam Hogg, “Why Small Companies Have the Innovation Advantage,” Entrepreneur, November 15, 2011, https://www.entrepreneur.com/article/220558.

38. Anthony Breitzman and Diana Hicks, “An Analysis of Small Business Patents by Industry and Firm Size,” cited in The Small Business Economy, 2009: A Report to the President (Washington, DC: US GPO, 2009), 29, https://www.sba.gov/sites/default/files/files/sb_econ2009.pdf.

39. Jose M. Plehn-Dujowich, “Product Innovations by Young and Small Firms,” (Washington, DC: SBA, Office of Advocacy, May 2013), 5, https://www.sba.gov/sites/default/files/files/rs408tot.pdf.

40. Jose M. Plehn-Dujowich, “The Effect of Firm Size and Age on R&D Productivity” (faculty paper, Department of Economics, SUNY at Buffalo, n.d., 435), https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2008&paper_id=510.

41. US SBA, Office of Advocacy, “Frequently Asked Questions” (Washington, DC: SBA, September 2012), https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.

42. Justin Hicks, “Knowledge Spillovers and International R&D Networks” (Washington, DC: Information Technology and Innovation Foundation, May 7, 2012), http://www2.itif.org/2012-knowledge-spillover-hicks.pdf.

43. Shane, The Illusions of Entrepreneurship, 65.

44. Ibid.

45. Erik Hurst and William Pugsley, “What Do Small Businesses Do?,” paper presented at the Brookings Conference on Economic Activity, Washington, DC, Fall 2011, 21, https://www.brookings.edu/bpea-articles/what-do-small-businesses-do.

46. Ibid.

47. Anthony Breitzman and Diana Hicks, “An Analysis of Small Business Patents by Industry and Firm Size,” in Rowan University, Faculty Scholarship for the College of Science & Mathematics (Glassboro, NJ, November 2008), iii.

48. Nolan, Zhang, and Liu, The Global Business Revolution and the Cascade Effect, 146, table 6.1.

49. National Science Foundation, “Business Research and Development and Innovation: 2012,” NSF 16-301 (Arlington, VA: NSF, October 29, 2015), table 5, https://nsf.gov/statistics/2016/nsf16301/#chp2.

50. Ibid., table 51.

51. Michael Mandel, “Scale and Innovation in Today’s Economy” (Washington, DC: Progressive Policy Institute, December 2001), 3, http://progressivepolicy.org/wp-content/uploads/2011/12/12.2011-Mandel_Scale-and-Innovation-in-Todays-Economy.pdf.

52. Adams Nager, David Hart, Stephen Ezell, and Robert D. Atkinson, “The Demographics of Innovation in the United States” (Washington, DC: Information Technology and Innovation Foundation, February 2016), http://www2.itif.org/2016-demographics-of-innovation.pdf?_ga=1.150326719.884756560.1448881039.

53. Luc L. G. Soete, “Firm Size and Inventive Activity: The Evidence Reconsidered,” European Economic Review 12, no. 4 (October 1979): 319–340, https://ideas.repec.org/a/eee/eecrev/v12y1979i4p319-340.html.

54. Wesley M. Cohen and Steven Klepper, “A Reprise of Size and R & D,” Economic Journal 106, no. 437 (July 1996): 948, http://www.jstor.org/stable/2235365.

55. Ibid.

56. Ibid.

57. Anne Marie Knott and Carl Vieregger, “Reconciling the Firm Size and Innovation Puzzle,” Center for Economic Studies Paper 16-20 (Washington, DC: US Census Bureau, March 2016), https://www2.census.gov/ces/wp/2016/CES-WP-16-20.pdf.

58. Zeina Alsharkas, “Firm Size, Competition, Financing and Innovation,” International Journal of Management and Economics (Zeszyty Naukowe KGŚ) 44 (December 2014): 58, http://kolegia.sgh.waw.pl/pl/KGS/publikacje/Documents/IJME44_ZN%2044%20(1).pdf.

59. “SMEs in Japan: A New Growth Driver?,” Economist Intelligence Unit, December 2010, https://www.eiuperspectives.economist.com/sites/default/files/EIU_Microsoft_JapanSMEs_FINAL-WEB.pdf.

60. Patrizio Pagano and Fabiano Schivardi, “Firm Size Distribution and Growth,” Scandinavian Journal of Economics 105, no. 2 (2003): 272, http://onlinelibrary.wiley.com/doi/10.1111/1467-9442.t01-1-00008/abstract.

61. Alsharkas, “Firm Size, Competition, Financing and Innovation,” 58.

62. Shane, The Illusions of Entrepreneurship, 23.

63. Ibid.

64. Keith Pavitt, Michael Robson, and Joe Townsend, “The Size Distribution of Innovating Firms in the UK: 1945–1983,” Journal of Industrial Economics 35, no. 3 (1987): 297–316, http://econpapers.repec.org/article/blajindec/v_3a35_3ay_3a1987_3ai_3a3_3ap_3a297-316.htm.

65. Giovanni Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsenigo, “The New Techno-Economic Paradigm and Its Impact on Industrial Structure,” in Techno-Economic Paradigms: Essays in Honor of Carlota Perez, ed. Wolfgang Dreschsler, Rainer Kattel, and Erik S. Reinert (London: Anthem Press, 2011), 84.

66. Acs and Audretsch, Innovation and Small Firms, 50.

67. Ibid., 55.

68. Paroma Sanyal and Linda R. Cohen, “Powering Progress: Restructuring, Competition, and R&D in the U.S. Electric Utility Industry,” Energy Journal 30, no. 2 (2009): 41–79, https://www.jstor.org/stable/41323233?seq=1#page_scan_tab_contents.

69. John M. Vernon and Peter Gusen, “Technical Change and Firm Size: The Pharmaceutical Industry,” Review of Economics and Statistics 56, no. 3 (August 1974): 294–302, http://www.jstor.org/stable/1923966.

70. Robert P. Rogers, “Staff Report on the Development and Structure of the U.S. Electric Lamp Industry” (Washington, DC: Federal Trade Commission, Bureau of Economics, February 1980), https://www.ftc.gov/sites/default/files/documents/reports/bureau-economics-staff-report-development-and-structure-u.s.electric-lamp-industry/198002electriclampindustry.pdf.

71. Keith Fuglie, Paul Heisey, John Kind, and David Schimmelpfennig, “Rising Concentration in Agricultural Input Industries Influences New Farm Technologies” (Washington, DC: US Department of Agriculture, December 3, 2012), http://www.ers.usda.gov/amber-waves/2012/december/rising-concentration-in-agricultural-input-industries-influences-new-technologies.

72. Antonio J. Revilla and Zulima Fernández, “The Relation between Firm Size and R&D Productivity in Different Technological Regimes,” Technovation 32, no. 11 (November 2012): 609–623, https://www.researchgate.net/publication/257002756_The_Relation_between_Firm_Size_and_RD_Productivity_in_Different_Technological_Regimes.

73. Ibid.

74. Quoted in Acs and Audretsch, Innovation and Small Firms, 50.

75. Barry C. Lynn, “Antitrust: A Missing Key to Prosperity, Opportunity, and Democracy” (New York: Demos, New Economic Paradigms, and Rockefeller Foundation, n.d.), http://www.demos.org/sites/default/files/publications/Lynn.pdf.

76. Seth Goldman, personal conversation with Robert Atkinson, November 4, 2016.

77. Hurst and Pugsley, “What Do Small Businesses Do?” 73.

78. Ibid., 75.

79. Ibid., 96.