Innovation and the small and medium sized firm

Abstract

Analyzes the role of small- to medium-sized manufacturing firms in innovation and the economy, arguing for active government assistance. Small- to medium-sized firms (SMEs), defined as firms with less than 500 employees, play a crucial role in the economy, though this analysis supports Schumpeter's (1939) argument that the role of SMEs varies from industry to industry, and within an industry as it develops. Multiple general and technology policy reasons are given for support of SMEs, including that SMEs lead to a more favorable balance of economic power, mutually beneficial small/large firm relations, and a significant source of employment. Additionally, research supporting a model developed by Abernathy and Utterbach (1975) shows that in certain industry sectors, small firms contribute to a disproportionately high percentage of radical innovations. Similarly, calculations of the National Science Foundation's industrial R&D statistics (1976) show that small firms have performed better in terms of innovation measured against dollar expenditure than have large firms. The importance and effectiveness of entrepreneurship in small firms is discussed, as well as strategies for large firms to adopt small-firm entrepreneurial methods. After analyzing the differing economic roles of SMEs in the United Kingdom, Japan, and the United States, it is determined that SMEs play the most vital role in the United States where they are seen as the cornerstone of a free market economy -- though differences from sector to sector are to be accounted for. Thus, SMEs merit government support, which they have been receiving in many forms, including entrepreneurial education, tax concessions, technical and information services, a network of industrial research organizations, etc. Concludes that SMEs are essential to the innovative progress of the economy, especially playing highly significant roles at the early, fluid stages of development in new technological industries. (CJC)

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