Are larger companies more innovative than smaller ones?

Over the last century there has been much debate about whether larger companies are more innovative than smaller ones. One of the earliest figures to comment on this topic was Austrian Economist Joseph Schumpeter, who was initially of the opinion that smaller companies were more innovative, but changed his mind in the 1940’s. Today the internet has lowered the barriers to entry for entrepreneurs starting a business, and much more information is freely available online, meaning this has once again become a frequently debated topic over the last decade. In today’s business culture, the natural expectation seems to be that smaller companies are more innovative, although notable ‘tech giants’ such as Apple and Google have helped disprove this theory.

Below we look at both the reasons why larger companies might be more innovative.

Advantages of Larger Companies

More Capital and Resources

Research and Development, particularly at any sort of scale, is often capital-intensive. This instantly gives larger companies a significant advantage over smaller ones, as they usually have better cash flow, meaning they can often set up a separate department for R&D. They can also invest heavily in recruiting the most talented individuals, further increasing the likelihood of innovation within the organisation. Healthy cash flow also allows large companies, in theory, to take more risks and be more aggressive with their R&D spending, as a failed project is highly unlikely to cause irrecoverable financial damage to the company. In small businesses, a general lack of staff and resources means that each person in the company must fill many different roles, meaning they only have a limited amount of time to spend on research and development. Also, if an R&D project fails, this can literally cripple or even bankrupt the business.

Large Customer Base

Bigger companies often have a large customer database that they can market their new products to, and also have an established brand meaning they are both known and trusted. The importance of this cannot be underestimated. When a small company does something highly innovative, there is often much additional work to be done, such as finding external investment or selling the innovation to another company, as well as an extensive and often expensive marketing and PR campaign to promote the new innovation and build the company’s brand. When a company like Apple releases a new model of its iPhone, it instantly has millions of customers ‘on tap’; small companies do not have this luxury.

Higher Barriers To Entry

Both of the points above create barriers to entry for large firms. They also have far more robust methods of protecting their intellectual property, often having legal expertise in-house, or a legal team that they can employ to help ensure that their intellectual property is protected. Many smaller businesses often have to deal with the problem of other businesses trying to copy their innovations, and may not have the resources to robustly protect their I.P. Furthermore, larger companies often have more robust systems and processes in place for both managing and facilitating innovation, right through from the research and development phase to the product development and sales and distribution of the product in question.

We can see that there is a very compelling case for bigger companies being more innovative than smaller ones, and in the next article we’ll look at the case for why smaller companies are more innovative.