‘Big and Clever’, Schumpeter Column, Economist Magazine, December 2011

I couldn’t find space for this article last time but think it worth carrying forward, because of the issues it raises about the best environment for innovation.  The modern Schumpeter starts by telling us that, many years ago, the original Schumpeter changed his mind about the answer to this fascinating and enduring question - does the best innovation come from small or large firms?

Too often there is the over-simplified assumption that it is small firms who drive innovation because they are entrepreneurial and quick to respond to external trends; the large company by contrast is slow and bureaucratic and dampens the innovative fires of its people.  Hence the attempts by big companies to let their research people recreate the small business atmosphere, memorably described as ‘Skunk Works’  in Peters and Waterman’s book  ‘In Search of Excellence’ thirty years ago.

Schumpeter quotes recent research by Michael Mandel of the Progressive Policy Institute which questions the validity of this assumption and suggests that, with increasing globalisation and big ecosystems, big companies have the scale and skills to innovate more effectively than their smaller competitors.  He also suggests that Western Governments are too obsessed with promoting small businesses and should focus more on a few major players.  Instead they do the opposite, regulating mergers and potential monopolies which would achieve greater scale.

Schumpeter builds on Mandel’s argument by adding the further advantage that the large companies have, the ability to recruit the best innovative talent.  He also argues that big high tech companies who have grown rapidly - Apple, Google, Facebook - have tried hard to retain the innovative culture that started them on the road to growth.  He also points out that big companies like P&G are tapping into the innovative skills of smaller companies via projects and alliances, thus getting the best of both worlds.

But while accepting some of Mandel’s conclusions, Schumpeter rightly challenges its general application. He makes the point which MTP covers in strategy sessions and which was a theme of the excellent book ‘Fast Second’ by Markides and Geroski, - that things are different when ‘disruptive innovation’ is involved.  Disruptive innovation is the sort of breakthrough which changes the rules of the game and this more normally comes from the smaller enterprise.  The big companies may then be the ones who build on that innovation and improve it on an incremental basis, but it is the minnows that start things off.  And of course those minnows may eventually grow to become big companies themselves.

Therefore the conclusion has to be that the big versus small argument is based on a false dichotomy and that there should be a place for innovation from both types of business in a healthy economy.  Governments should continue to encourage small businesses but also - and here is a lesson for the UK government - stop demonising and restricting those large companies who provide growth and employment.

Click below to see the original article;

http://www.economist.com/node/21541826