How E-planning for Retirement Can Help Lower-Income Savers
The 2012 Retirement Confidence Survey recently released by the Employee Benefit Research Institute (EBRI) confirms that many U.S. workers know that they are not saving…
Occupational Licensing: How A New Guild Mentality Thwarts Innovation
The late economist Mancur Olson would have been a fan of Jonathan Ames. Ames is the creator of the HBO series Bored to Death as…
Measuring the Real Impact of Imports on Jobs
When it comes to manufacturing, most politicians, economists, and journalists agree: the millions of manufacturing jobs lost in recent years are mostly not coming back….
Hidden Toll: Imports and Job Loss Since 2007
“We have a huge opportunity, at this moment, to bring manufacturing back…but we have to seize it.” With these words in his State of the…
A National Infrastructure Bank: A Road Guide to the Destination
Download the entire memo. President Obama has proposed a National Infrastructure Bank, a simple declarative sentence that left most listeners wondering what he meant. The…
How Rising Health Costs Slow Wage Growth
Most Americans are painfully aware that their health care premiums are rising faster than other necessities of life. Many also know that their earnings are…
Innovation by Acquisition: New Dynamics of High-tech Competition
Right now policymakers are grappling with the implications of slow economic growth in the United States and the rest of the industrialized world. One response…
Antitrust and the Technology Sector
Can government policy encourage technology innovation in the short run? Probably not—while the government does have plenty of long-term levers, such as spending on basic…
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.