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The Credit Gap: Easing the Squeeze on the Smallest Businesses

Among the many casualties of the 2007-2008 financial meltdown were small businesses. As the financial system virtually shut down, millions of small business owners across…

Scale and Innovation in Today’s Economy

Conventional wisdom these days says that small is better when it comes to innovation and putting new ideas into practice. Large enterprises are typically thought…

Scale and Innovation in Today’s Economy

Conventional wisdom these days says that small is better when it comes to innovation and putting new ideas into practice.1 Large enterprises are typically thought of as hidebound defenders of the status quo, dominating by market power and brute force rather than technological and innovative prowess.

Yet reality is far more complicated than this simple small versus big distinction. As we all know many common-sense beliefs turn out to be only partly true, or not to be true at all.

In this policy memo we will reconsider the link between scale (size) and innovation. After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity.

The now-heretical idea that scale is an advantage for innovation actually dates back more than 60 years. Back then, Harvard economist Joseph Schumpeter, the inventor of the term ‘creative destruction’, suggested that large-scale firms were “the most powerful engine of progress.” Following after his work, economists developed what came to be known as the “Schumpeterian Hypothesis.” The first part of the Schumpeterian Hypothesis was the argument that bigger firms have more of an incentive to spend on innovation than a smaller one. For example, if we compare a company that manufactures 50 million t-shirts a year versus one that manufactures 10,000 t-shirts a year, the larger company is much more like to spend the big bucks needed to develop and test a new process for dyeing the t-shirts.

The second part of the Schumpeterian Hypothesis is the observation that companies with more market power might also be more willing to invest in innovation. The argument is that if a firm in an ultra-competitive market innovates, the new product or service is quickly copied by rivals, so that the gains from innovations are quickly competed away. Conversely, a firm with market power has the ability to hold onto some of its gains from innovation, so it may pay to invest in product or other improvements.

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The Hill: Cutting through the regulatory thicket

Representatives Patrick Murphy (D-Fla.) and Mick Mulvaney (R-S.C.) wrote an op-ed for The Hill published today on their Regulatory Improvement Commission (RIC) bill.  PPI’s RIC proposal,…

Can the Internet of Everything Help Cities?

Local governments are about delivering services and getting things done: Fixing highways, running buses, picking up trash, ensuring public safety, educating children. To do their…

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Congress Answers PPI Call, Exempts End-Users From Dodd-Frank

The Senate voted 93-4 Thursday to reauthorize the Terrorism Risk Insurance Act (TRIA) for six years. The legislation, which is expected to be signed into…

A Politically and Technically Feasible Approach for Handling Regulatory Accumulation

Regulatory accumulation threatens the pace of innovation and growth in America, yet previous attempts to address it have proven unsuccessful. That is why we propose…

Where Government is Working

With the federal government in gridlock, cities step into the breach. Welcome to New Orleans, city of the future. Wait, New Orleans? The decadent old…

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