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Industry innovativeness, firm size, and entrepreneurship: Schumpeter Mark III?

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Abstract

Emphasizing the dynamics in economies and industries, Schumpeter points to entrepreneurs carrying out ‘new combinations’. His work, and in particular the Theory of Economic Development, is often interpreted as praising individual entrepreneurs setting up new firms to contribute to an industry’s innovativeness. This has come to be referred to as the Schumpeter Mark I perspective. Later, however, in his Capitalism, Socialism, and Democracy, Schumpeter has rather suggested that large incumbents are best positioned to contribute to an industry’s innovativeness (Schumpeter Mark II). In this discussion, however, the possibly different effects of structural as opposed to dynamic industry competitiveness is often not taken into account. In addition, the contribution of new and small firms to industry innovativeness are often conflated. Using New Product Announcements as a measure of innovation, we find that industries dominated by small firms prove consistently and significantly more innovative than industries where large firms dominate. Taking account of industries’ structural and dynamic levels of competition, we find that high existing and increasing levels of new firms entering an industry, exercising what Schumpeter called the ‘entrepreneurial function’, actually decrease industry innovativeness. We conclude that the contribution of small firms in terms of industry innovativeness is different from that of large as well as new firms, suggesting a Schumpeter Mark III perspective.

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Notes

  1. Some have looked at the reverse, to determine if innovativeness affects industry structure. (Geroski and Pomroy 1990), for instance, argue that innovation will over time lead to less concentrated markets.

  2. Assuming that each firm has a single innovation in the period studied could be seen to under-represent the contribution of large firms to industry innovativeness. The size distribution of firms in the country studied indicates that it will be unlikely (see Leydesdorff et al. 2006 for the Netherlands): very few firms are large. By separately including variables for firm and industry size we further control for the possible bias in the findings. In addition, as Van der Panne (2007) has shown, LBIO data tends to over-emphasize the role of large firms for industry innovativeness.

  3. Changing the period chosen does not change the findings.

  4. In the case of over-dispersion, i.e. σ i > μ i , a Poisson model under-estimates dispersion, resulting in downward biased standard errors (Cameron and Trivedi 1986). The negative binomial regression model addresses this issue by introducing the parameter α, reflecting unobserved heterogeneity among observations. A consequence of the downward biased standard errors is that this estimation model is more conservative than a standard poisson model for count data.

  5. Using the Lerner Index or price-cost margin as a measure of competition and patents as a measure of innovation, Aghion et al. (2005) find that innovativeness was highest when competition was either low or high. In part, the different findings we present may be due to the different measures used. Our data, which includes information on patent ownership, does not indicate that firms size and patent ownership is somehow correlated, however.

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Authors and Affiliations

  1. School of Economics and Business Groningen, University of Groningen, Groningen, the Netherlands

    Wilfred Dolfsma

  2. Windesheim University of Applied Sciences, Zwolle, the Netherlands

    Gerben van der Velde

Authors
  1. Wilfred Dolfsma
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  2. Gerben van der Velde
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Correspondence to Wilfred Dolfsma.

Additional information

We would like to thank William Baumol, Sharon Belenzon, Florian Noseleit as well as seminar participants at the universities of Groningen, Lund, Utrecht, Windesheim and at a AEA session in New Orleans for their comments and suggestions. In addition, we would like to thank anonymous referees for this journal, and the associate editor and editor for support and critical yet constructive encouragement

Appendix

Appendix

Table 4 Correlation Matrix
Full size table
Table 5 Innovativeness: Innovators vs Innovations
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Table 6 Innovativeness: Innovators vs Innovations
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Fig. 1
figure 1

Innovation counts by a industry, and b firm size: CIS versus LBIO database †b)

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Dolfsma, W., van der Velde, G. Industry innovativeness, firm size, and entrepreneurship: Schumpeter Mark III?. J Evol Econ 24, 713–736 (2014). https://doi.org/10.1007/s00191-014-0352-x

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