Does Firm Size Matter for Breakthrough Innovations? Evidence from a Dataset of Innovation Awards

In recent years, many authors have tried to shed some light on the relationship between the size of a company and the outcomes of its innovative activities. In particular, they have tried to understand how firm size influences the process of innovative creation. Probably, one of the most interesting debate on innovation concerns the origin of breakthroughs, namely whether they are more easily developed by large established companies or by small new entrants. Moreover, a small circle of interesting attempts focuses on the evolution of this relationship over time. However, the conclusions drawn by these studies about the role of size are sometimes different and sometimes even opposite. For example, as states by Baumol (2005, p. 34): "an examination of the list of revolutionary technological breakthrough since the onset of the industrial revolution suggests that they were contributed in overwhelming proportion by independent inventors and small, newly founded enterprises, not by major firms". In contrast, Methé et al. (1997) argues that established firms play a vital role in the innovation process of an industry and that their contributes to major innovations is often underemphasized in the literature. Moreover, also diversifying entrants can play an important role in innovation (Klepper and Simons, 2000). At first sight, this discussion may seem strange, since most of the total private-sector expenditure on R&D is incurred by incumbents; however, while R&D investments become more formalized and increase with firm size, R&D productivity declines. Hence, there exists a space in which even smaller firms can be competitive with their innovative activities, although some budget constraints (Pavitt et al., 1987; Cohen and Klepper, 1996). Thus, due to these contradictory results, a debate has emerged between different streams of research.

As Baumol (2005) suggests, due to different bases of thinking, established and small firms conduct R&D in a different way: large industrial laboratories focus on incremental and "less spectacular" innovations, while small firms try to develop something more "radical". Instead of clash, these two approaches are highly complementary. In fact, while a breakthrough is indispensable to open new trajectories, successive incremental improvements refine their boundaries and shape their characteristics. A determinant of these two different ways of action may be the different educational background of R&D employees. Due to deeper degree of competences specificity that large firms need, they tend to recruit highly educated personnel that relies on sectoral specific knowledge and mindset, while this propensity is less accentuated in smaller enterprises.

To better understand this framework, it is useful to formalize the concept of "routines" and the theory of inertia (Chandy and Tellis, 2000). In a broad perspective, routines represent all the formalized approaches that a firm needs to carry out its business operations at several levels. As we can expect, this concept is strictly related to the discussion we have made about competences; in fact, since the beginning of their activity, firms develop a pattern of solutions to overcome daily challenges. If these solutions prove to be functional, they are internalized by the firm to be exploited to solve future similar problems, otherwise they are considered as ineffective. Even if these routines represent important specialized competences in the short-term, the risk of their obsolescence is undeniable as a consequence of changes in the environmental and technological conditions; unfortunately, especially for large firms, core competences may become core rigidities (Chang et al., 2012), or "internal barriers" as Sandberg and Aarikka-Stenroos (2014) define them. For example, when an innovation is introduced, established firms "may lack the necessary core competencies to take advantage of the innovation" (Markides, 1999, p. 61).

At the end, this organizational inertia ends up poisoning the innovative processes within a firm. Indeed, "new knowledge bases require the creation of new routines, so that established firms may have to bear the costs of disrupting established routines and will often have to overcome organizational resistance to change. New companies bear only the cost of establishing the new routines. To the extent that financial capital is available, new firms will be more likely to develop the routines needed to create and use the new knowledge" (Methé et al., 1997, p. 1192). Moreover, advancing the idea of illegitimacy, Dougherty and Heller (1994, p. 201) states: "we develop the idea that the necessary activities of product innovation do not fit into the institutionalized practices in large old firms. These activities either violate the existing system of thought and action, or fall into a vacuum where no shared understandings exist to make them meaningful". In contrast, it seems that small and new firms do not suffer from this lock-in effects, configuring themselves as flexible organizations that are able to fight against obsolescence.

According to what has just been said, it would seem that the fight between David and Goliath has an unquestionable winner: David. However, unlike the end of biblical story, in this case Goliath has something to say. Coming out of the metaphor, established firms can try to fight against competences obsolescence and organizational pathologies, trying to strike a balance between current needs and new activities and opportunities (Markides, 1999; Garvin and Levesque, 2006). In fact, exploiting powerful financial resources, technological expertise, reputation and networks with customers and suppliers, peculiarities that are not always possessed by small firms (Chandy and Tellis, 2000), incumbents can start a process of renewal. In particular, established firms can react against three different but contextual types of "traps": the familiarity trap, the maturity trap and the propinquity trap (Ahuja and Lampert, 2001).