Enterprise and Small Business Principles

The industry context

In comparison with the number of studies investigating the relationship between firm size and technological change, those examining the relationship between innovation and the external industry structure or environment are what Baldwin and Scott (1987, p. 89) term ‘minuscule’ in number. While it has been hypothesised that firms in con­centrated industries are better able to capture the rents accruing from an innova­tion, and therefore have a greater incentive to undertake innovative activity, there are other market structure variables that also influence the ease with which economic rents can be appropriated. For example, Comanor (1967) argued and found that, based on a measure of minimum efficient scale, there is less R&D effort (average number of research personnel divided by total employment) in industries with very low-scale economies. However, he also found that in industries with a high minimum efficient scale R&D effort was also relatively low. Comanor interpreted his results to suggest that, where entry barriers are relatively low, there is little incentive to innovate, since the entry subsequent to innovation would quickly erode any economic rents. At the same time, in industries with high entry barriers, the absence of potential entry may reduce the incentives to innovate.

Because many studies have generally found positive relationships between market concentration and R&D, and between the extent of barriers to entry and R&D, it would seem that the conventional wisdom built around the Schumpeterian hypo­thesis has been confirmed. However, when the direct measure of innovative output is related to market concentration, there appears to be unequivocal evidence that con­centration exerts a negative influence on the number of innovations being made in an industry.

Not only does market structure influence the total amount of innovative activity but also the relative innovative advantage between large and small enterprises. The differences between the innovation rates of large and small firms examined in the pre­vious section can generally be explained by: the degree of capital intensity; the extent to which an industry is concentrated; the total innovative intensity; and the extent to which an industry is comprised of small firms. In particular, the relative innovative advantage of large firms tends to be promoted in industries that are capital-intensive, advertising intensive, concentrated and highly unionised. By contrast, in industries that are highly innovative and composed predominantly of large firms, the relative innovat­ive advantage is held by small enterprises.