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Technovation 22 (2002) 537–549

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Firm size and dynamic technological innovation


a,*
Gregory N. Stock , Noel P. Greis b, William A. Fischer c

a
Department of Operations Management and Information Systems, College of Business, Northern Illinois University, DeKalb, IL 60115, USA
b
Kenan Institute of Private Enterprise, Campus Box 3440, Kenan Center, University of North Carolina, Chapel Hill, NC 27599-3440, USA
c
IMD — International Institute for Management Development, Ch. de Bellerive 23, P.O. Box 915, CH-1001 Lausanne, Switzerland

Received 24 March 2001; accepted 9 June 2001

Abstract

Competitive strategy can be influenced by technological change and technological innovation over time, a process we refer to
as dynamic innovation. Using data from the computer modem industry, we examine the relationship between firm size and dynamic
innovation. Innovation performance is represented by the technological performance of the outputs of the firm’s innovation process,
namely new products developed by the firm. In contrast, the extant literature typically considers the relationship between size and
innovation at a single point in time, and innovation performance is generally characterized by the productivity of the innovation
process. Our findings indicate that smaller firms in the computer modem industry exhibit higher levels of dynamic innovation
performance.  2002 Elsevier Science Ltd. All rights reserved.

Keywords: Dynamic innovation; Technology; Firm size

1. Introduction vation characterizes innovation as “a change in tech-


nology which is manifested in the development of new
Technological change can be a critical driver of com- products” (Methe, 1992, p. 14, emphasis added). Tech-
petitive strategy (Porter, 1985; Nelson and Winter, nological change can therefore be characterized as a ser-
1982). In addition, technological change can affect the ies of innovations over time. Our interest in what drives
evolution of industry structure (Abernathy and Clark, technological change, therefore, is in essence an attempt
1985; Tushman and Anderson, 1986) and economic to understand the process of technological innovation
growth (Schumpeter, 1934; Solow, 1957). Given its over time, or more specifically, the process of creating
importance at these multiple levels of analysis, an a series of innovations over time. In this paper, we refer
important avenue of research would be an exploration to this process as “dynamic innovation.” Dynamic inno-
of the drivers of technological change. vation might be manifested in a number of ways,
Technological change is intertwined with the process although in this research we follow the approach of
of technological innovation, and a number of concep- Methe (1992) above and explicitly consider the techno-
tualizations of innovation explicitly include the rate of logical change embodied in new products developed by
change in the functional performance of a technology as the firm.
a key element (Schumpeter, 1942; Utterback and Aber- A logical next step is to investigate empirically which
nathy, 1975; Abernathy and Clark, 1985; Tushman and factors are related to this process of dynamic innovation.
Anderson, 1986; Anderson and Tushman, 1990; Hender- In the technology management literature, the relationship
son and Clark, 1990; Christensen, 1992a,b; Methe, 1992; between firm size and technological innovation has
Henderson, 1995; Khanna, 1995; Foster, 1986; Tushman received a good deal of attention. This general topic can
and Rosenkopf, 1992). In fact, one definition of inno- be traced back at least as far as Schumpeter (1942). The
straightforward quality of the question and the funda-
mental nature of firm size as an organizational variable
* Corresponding author. Tel.: +1-815-753-9329; fax: +1-815-753-
7460. likely account in large part for the attractiveness of the
E-mail addresses: gstock@niu.edu (G.N. Stock), noelFgrei- topic for research.
s@unc.edu (N.P. Greis), fischer@imd.ch (W.A. Fischer). Although there is a large literature investigating the

0166-4972/02/$ - see front matter  2002 Elsevier Science Ltd. All rights reserved.
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538 G.N. Stock et al. / Technovation 22 (2002) 537–549

relationship between firm size and innovation, this study challenge in providing greater data communications per-
provides two important contributions. First, we consider formance is in the ability of the modem to overcome the
the relationship between firm size and what we term physical limitations for data transmission inherent in a
dynamic innovation. There is a substantial body of telephone line.
research that has examined innovation in a dynamic con- The modem industry provides an attractive setting for
text (e.g., Abernathy and Clark, 1985; Tushman and this study for a number of reasons. The industry is tech-
Anderson, 1986; Abernathy and Utterback, 1978), but nology-intensive, meaning that the technological per-
the connection between firm size and dynamic inno- formance of a firm’s products is probably a key determi-
vation has received comparatively little attention. A nant of the firm’s market success. There is also a fairly
second contribution concerns the assessment of inno- wide range of electronic technologies embodied in a
vation performance. In most of the literature on firm size modem (i.e., both analog and digital circuitry; both hard-
and innovation, the focus is on the efficiency, or pro- ware and software; large, complex integrated circuits
ductivity, of the process of innovation and whether larger such as microprocessors as well as simpler integrated
or smaller firms are able to innovate at a lower cost per circuits). The technical performance of modems has
innovation. Obviously, this issue is extremely important. increased many-fold over the industry’s lifetime. The
For two firms developing equivalent new products, the underlying technology itself in this industry has under-
one that is able to accomplish this task at the lower cost gone substantial change as well. In particular, the basis
will likely reap a competitive advantage. However, what for technological competence for firms in this industry
happens if the new products are not equivalent? A firm has evolved from the design and use of proprietary, dedi-
that is able to develop more technologically advanced cated hardware to the design and use of proprietary
products more quickly might have a competitive advan- software running on general-purpose hardware. This
tage that could overcome a disadvantage in the cost evolution has mirrored similar changes seen in com-
efficiency of its innovation process. In fact, the unique- puters and peripheral products such as printers and disk
ness and performance of a new product is often identified drives. From an organizational perspective, there is a
as a success factor in new product development (Cooper, diverse group of large and small firms developing and
1979, 1990; Cooper and Kleinschmidt, 1986). Therefore, manufacturing modems. The industry includes well-
we consider a second perspective in the performance of known firms such as IBM and Motorola, as well as
a firm’s technological innovation process. We explicitly lesser-known companies such as Boca Research.
consider in our innovation performance measure whether The remainder of this paper will be organized in the
the innovations created by a firm are more or less tech- following manner. The next section will further consider
nologically advanced. The most straightforward the concept of dynamic innovation, review background
approach to assess whether an innovation (a new product literature on firm size and innovation, and develop our
innovation in this paper) is technologically advanced is research hypothesis. The fourth section describes the col-
to consider its technical performance. Moreover, because lection and analysis of the data. The fifth section reports
we focus on the process of dynamic innovation, we con- the results of the data analysis and the evaluation of the
sider the rate of change in the technical performance of research hypothesis. The final section discusses impli-
a firm’s new products introduced over time. This second cations and directions for future research.
perspective we refer to as the effectiveness of the inno-
vation process.
To examine this topic, we have to chosen to focus on 2. Conceptual framework
dynamic innovation within a single industry, namely the
computer modem industry. Restricting the study to a sin- 2.1. Dynamic innovation
gle industry and product type may limit the extent to
which its results can be generalized. However, limiting Above, we introduced the concept of dynamic inno-
the study to modem manufacturers allows us to control vation as a process of creating a series of innovations
for industry effects that might otherwise confound our over time. In this section, we explore this idea in more
analysis. A “modem” (modulator–demodulator) is a detail. To begin, we first examine the general concept
device that allows a computer to send and receive data of technological innovation and associated literature. We
over telephone lines. Specifically, a modem converts will then consider dynamic innovation and literature
(modulates) the digital signals used by computers into related to topic.
analog signals that can be transmitted over telephone In general, an innovation refers to a new way of
lines. At the receiving computer, another modem con- accomplishing some task, or the implementation of an
verts the analog signal back (demodulates) into a digital idea. Therefore, “[i]nnovation does not occur when a
signal that can be used by the receiving computer. new idea is generated, but rather when that new idea is
Because telephone lines were designed for voice trans- put into use” (Damanpour, 1987, p. 676). A technologi-
mission many years before computers existed, a key cal innovation, which is the focus of this paper, is the
G.N. Stock et al. / Technovation 22 (2002) 537–549 539

use of new technology to produce changes in products dynamic context. This literature explores a number of
or services, or the ways in which products or services are areas including the relationship between changes in
produced (Damanpour, 1987). Therefore, a technological industry structure and changes in innovation
innovation can be thought of as the incorporation of (Schumpeter, 1942; Tushman and Anderson, 1986;
technology into the development of new products or pro- Abernathy and Clark, 1985); the relationship between
cesses. organizational changes and the relative importance of
This definition of innovation has specific implications product and process innovation over time (Utterback and
for how innovation should be measured. A good deal of Abernathy, 1975); the relative competencies of new
prior research in the relationship between firm size and entrants or established firms in responding to technologi-
innovation has used various proxy measures for inno- cal change (Tushman and Anderson, 1986; Henderson
vation, including indicators of innovative effort or and Clark, 1990; Christensen, 1992a,b); firm size, mar-
activity, such as R&D spending or R&D intensity (Acs ket structure, and evolutionary innovation (Methe, 1992;
and Audretsch, 1991a; Kamien and Schwartz, 1982). Nelson and Winter, 1982); technology life cycles
One conceptual problem with this type of measure is that (Anderson and Tushman, 1990; Khanna, 1995; Hender-
it is an input to the innovative process, not an output. son, 1995); and the specific form of technological tra-
Other research has attempted to remedy this shortcoming jectories over time (Dosi, 1982; Foster, 1986). Underly-
by using other measures, such as patents, patent ing much of this prior research is an implicit
citations, or scientific publications (Scherer, 1965; Halp- consideration of the rate of technological change. For
erin and Chakrabarti, 1987; Narin and Noma, 1987).1 example, the “era of ferment” found in the technology
While these measures are probably better, they still are life cycle of Anderson and Tushman (1990) is charac-
more closely related to inventive activity than inno- terized by rapid technological change; it is followed by
vation. They represent the generation of ideas, not neces- a period of slower, incremental change. Similarly, the
sarily the application of ideas to new products or pro- technology “S-curve” examined by Foster (1986) exhib-
cesses. Another body of literature has used the number its distinct periods of both slow change and rapid change
of innovations created by a firm as the measure of inno- in technical performance. Barnett and Clark (1996, p.
vation (Acs and Audretsch, 1987, 1988; Audretsch and 264) summarize the interconnected relationship between
Acs, 1991; Pavitt et al., 1987). These studies, however, technological change and product development in the
make no distinction between innovations with respect to following statement: “The entire sweep of technological
their quality or impact. In a similar vein, there has been changes over the past one hundred years is, in essence,
research focusing on the pharmaceutical industry that the sum of thousands of individual product development
has used the number of new drugs brought to market as projects in thousands of firms.” This focus on techno-
a measure of innovation (Graves and Langowitz, 1993; logical change leads us to select the rate of technical
Jensen, 1987). change in product performance as our approach to meas-
This paper, as we discussed above, focuses on what uring dynamic innovation performance. Therefore,
we refer to as the effectiveness of the innovation process, higher levels of dynamic innovation performance will be
which is reflected by the extent to which innovations indicated by higher rates of technological change in the
developed by this process are technologically advanced. performance of products developed by a firm.
Therefore, innovation performance is based on the tech-
nical performance of the products actually developed 2.2. Firm size and innovation
and introduced into the market by the firms in the indus-
try of interest. This conceptualization of innovation thus The question of whether large or small firms are more
incorporates both elements of our definition of a techno- technologically innovative has been the subject of a great
logical innovation. It reflects the implementation of an deal of controversy and research. The arguments in favor
idea as a new product, and it explicitly recognizes the of large or small firms as the engine of innovation can
application of technology in the new product. This take on an almost “theological” tone, as illustrated by the
approach is consistent with the definition of Methe lively and somewhat contentious debate between Gilder
(1992) above. (1988) and Ferguson (1988) in the Harvard Business
Beyond the general concept of innovation, we are con- Review and Ferguson (1988). The issue seems especially
cerned in this study with dynamic innovation, which unclear to managers and the popular business press. A
explicitly considers the process through which a firm recent sampling of general business publications shows
develops a series of innovations over time. There is a a recent wave of mergers and consolidations that reflects
good deal of literature examining innovation in a a belief that size provides a number of advantages, many
of them related to technological capabilities, and is
necessary to compete effectively, particularly over the
1
See Griliches (1990) for an extensive review of the literature long term (Colvin, 1999; Kupfer, 1998; Harrington et
employing patent statistics. al., 1998; Anon., 1998b; Greising et al., 1998). The view
540 G.N. Stock et al. / Technovation 22 (2002) 537–549

is not universally accepted, however, as many believe addition, a large multiproduct firm will have more
that size achieved through merger and consolidation is opportunities for diversification of R&D projects, and
fraught with difficulties (Loomis, 1999; Taylor, 1999; will therefore be able to realize a higher yield from the
Garten, 1998; Anon., 1998a). At the same time, a num- resources devoted to R&D (Kamien and Schwartz,
ber of firms, even in the midst of a robust economy, 1982). Another way to think of this point is that a larger
have reduced workforce size through actions known by firm will have the resources to tolerate an occasional
a variety of names, including layoffs, downsizing, reen- unsuccessful R&D project (Damanpour, 1992).
gineering, and outsourcing (Koretz, 1998; Greising, On the opposing side, there are arguments that smaller
1998). Too often, however, reducing the size of the firm firms have greater advantages in innovation. In general,
is motivated only by a desire to cut costs. The danger a smaller firm might be more innovative because it
of such a narrow focus is that it may result in a weaken- would be expected to be more flexible and therefore be
ing or elimination of core technological capabilities that better able to accept and effect change (Damanpour,
can determine the success of the firm over time (Prahalad 1992). In a large firm, there is a good deal more bureauc-
and Hamel, 1990; Anon., 1995; Bernstein, 1998). racy, which leads to more difficult communication and
Scholarly study of the relationship between firm size coordination of R&D. Gilder (1988) similarly attributes
and innovation can be traced to the work of Schumpeter the innovative advantage of small firms to an ability to
(1942), specifically to the idea of the Schumpeterian avoid the “bureaucratic inertia” found in large compa-
hypothesis. This “hypothesis” actually is a set of two nies and to a greater ability to adapt to changes in mar-
hypotheses. The first states that there will be a positive kets. Also, unforeseen research findings may be more
relationship between innovation and monopoly power; likely to go unrecognized among the larger volume of
the second states that large firms will be more than pro- R&D activity occurring in a large firm. Another con-
portionately more innovative than small firms. Kamien sideration is that engineers and scientists in a smaller
and Schwartz (1982) also note that this second hypoth- firm may be more highly motivated than in a large firm.
esis, while attributed to Schumpeter, was developed In a small firm, the compensation of an individual may
more fully by Galbraith (1956). In the remainder of this be more tightly linked to performance than in a large
paper, when we refer to the “Schumpeterian hypothesis” firm, particularly in those entrepreneurial firms where a
we will be referring to the second hypothesis. In this scientist or engineer receives stock or stock options as
section we first examine the reasoning for and against part of a compensation package. Moreover, the contri-
the Schumpeterian hypothesis, as well as the research bution of an individual in a small firm is likely to have
evidence supporting these conflicting arguments. Then a more visible impact on the firm’s overall performance
we consider how prior research in dynamic innovation than in a larger firm, which would also lead to a higher
relates to the Schumpeterian hypothesis. degree of motivation (Kamien and Schwartz, 1982).
Research examining the relationship between firm size As noted above, there is an extensive literature that
and innovation has come primarily from an economics empirically examines the relationship between firm size
perspective. The arguments in favor of the Schumpeter- and technological innovation. In their literature review,
ian hypothesis draw primarily on the concept of econom- Kamien and Schwartz (1975, p. 15) characterize the
ies of scale in R&D activities, which has a number of objective of this stream of research in the following
possible explanations. For example, a larger firm will manner: “A statistical relationship between firm size and
have the ability to employ a larger R&D staff, which will innovative activity is most frequently sought with explo-
lead to economies of scale in R&D. These economies of ration of the impact of firm size on both the amount of
scale can be traced to a number of factors. The first is innovational effort and innovation success.” We will not
that engineers and scientists will be more effective when attempt to review this entire body of literature.2 How-
they have more colleagues with whom to interact. In ever, we will highlight some of the more relevant
addition, a large staff can allow the division of labor in research.
research and development. A third possible advantage of Consistent with our observations above concerning
size is that a larger R&D group is more likely to recog- the conceptual difficulties in using inputs as a measure
nize the importance of unforeseen discoveries (Kamien for innovation, we consider here only the research relat-
and Schwartz, 1982). More generally, larger size will ing firm size to innovation outputs. Unfortunately, the
allow a firm to accumulate a larger store of technological literature relating firm size to innovative or inventive
knowledge and capabilities (Damanpour, 1992). These outputs shows decidedly mixed results. Kamien and
factors relate principally to the technical development of Schwartz (1982, p. 84) find that “beyond some magni-
innovations. Perhaps as important is the advantage a
larger firm will enjoy in the exploitation of the technical
advances. The reasoning here is that a larger firm will be 2
For a thorough review of the early literature see Kamien and
in a better position to exploit an unforeseen innovation Schwartz (1982). For a review of more recent literature, see Acs and
because it can more easily enter a new market. In Audretsch (1991b).
G.N. Stock et al. / Technovation 22 (2002) 537–549 541

tude, size does not appear to be especially conducive to the evolutionary framework. We recognize that there are
either innovational effort or output.” More recent arguments and a good deal of empirical evidence contra-
research has shown similar results. A number of studies dicting the Schumpeterian hypothesis. However, in this
have shown that patent counts increase at a rate that is paper we find the theoretical arguments and empirical
less than proportional to firm size (Bound et al., 1984; evidence compelling enough to adopt a position consist-
Schwalbach and Zimmerman, 1991; Chakrabarti and ent with the evolutionary framework and the Schumpet-
Halperin, 1991). Other studies using the number of inno- erian perspective. Therefore, our research hypothesis can
vations (Acs and Audretsch 1987, 1988; Audretsch and be stated in the following manner:
Acs, 1991), the number of new drugs brought to market
(Graves and Langowitz, 1993), and scientific publi- H1: Firm size will be positively related to dynamic
cations (Halperin and Chakrabarti, 1987) have yielded technological innovation performance.
similar findings. On the other hand, there is research
showing that larger firms have an advantage in inno- Recall that we have conceptualized and will measure
vation, at least in some cases (Henderson and Cockburn, dynamic innovation performance as the rate of change
1996; Lichtenberg and Siegel, 1991; Mansfield, 1980; in new product technical performance. The research
Harrison, 1994; Cohen and Klepper, 1996). hypothesis suggests that the rate of change would be
The prior research has examined the relationship greater for larger firms, so to test this hypothesis, we
between firm size and innovation. This literature pro- need to determine whether the rate of technical change
vides a starting point from which to develop a conceptual depends on firm size. We will discuss the details of our
framework for our subsequent analysis. However, its analysis below.
usefulness in our study is limited in three ways. First,
the contradictory nature of both the conceptual and
empirical findings related to firm size and innovation 3. Methodology
does not provide clear guidance of what to expect in
general. Second, as we have noted above, the economics 3.1. Data and variables
literature typically considers the relationship between
firm size and the productivity of the innovation process, Data for this study were collected from the computer
rather than the relationship between firm size and the telephone modem industry for the period from 1974
performance of the technology that is the output of the through 1993. Two different sets of data are used in this
innovation process. Although the two outcomes may study. One data set consists of information about the
very well be related, it is not clear that they necessarily technical performance of products introduced by firms
would be. Third, for the most part, the empirical research in this industry during the time horizon of the study. This
in this area typically considers the relationship between data set was constructed from yearly modem industry
firm size and innovation only at a single point in time. overview reports from Datapro Research, Inc. (Anon.,
At this point, we also need to consider how the literature 1976–1993). Datapro, a subsidiary of McGraw-Hill, Inc.,
on dynamic innovation discussed above applies to the is a firm that collects information and publishes reports
relationship between firm size and innovation. Although on many segments of the information technology indus-
this literature provides a good base on which to concep- trial sector, including software, computers, and data
tualize technological change, for the most part it does communications equipment. One series of publications
not consider the firm size explicitly as an organizational provides detailed information about modem manufac-
variable. However, the evolutionary framework of Nel- turers on a yearly basis. Each of these overview reports
son and Winter (1982) is an exception. We will use this provides a discussion of the technical operation of mod-
framework in addition to the larger body of literature ems, new technical advances in the industry, activity by
relating firm size and innovation reviewed above to leading firms in the industry, and most importantly for
develop a research hypothesis relating firm size to this study, a comprehensive listing of modem products
dynamic technological innovation. offered for sale during the year of the report. A set of
The evolutionary framework argues that sustained reports published from 1976 through 1993 was pur-
innovation will require more resources, which gives chased from Datapro. These reports listed products that
larger firms an advantage. In addition, larger firms are had been introduced in the years 1974 through 1993.
better able to appropriate returns from their innovation The information for each product included the company
and are less vulnerable to temporary periods of lower selling the product, the model name or number, technical
innovative performance. The evolutionary framework specifications, the year the product was first sold, and
therefore provides a theoretical justification for the other information. The technical specification of data
expectation that larger firms will be more innovative. In transmission rate in bits per second and the year of intro-
addition, in his study of the semiconductor industry duction were the two items that were used in this study
Methe (1992) found empirical support for this aspect of to assess product performance and ultimately technologi-
542 G.N. Stock et al. / Technovation 22 (2002) 537–549

cal innovation by the firm. Data for firm size were may have other technical features, the data transmission
obtained from a variety of archival sources, including rate is the key capability. Whatever other capabilities
Standard and Poor’s Compustat data base of information two modems may have, a 14,400 bit per second modem
on publicly traded firms and industry directories such as will likely be considered to have higher performance
Standard and Poor’s Register of Corporations, Corporate than a 9600 bit per second modem. The use of a single
Technology Directory, and Ward’s Directory of Cor- “fundamental” measure of performance in this way is
porations (Anon. 1986–1994; 1987–1994; 1971–1994; found in a good deal of research in technology and inno-
1994). Both the product data set and the firm variable vation, particularly when considering technological
data set were constructed on a year-by-year basis and change. For example, in computer disk drives, Chris-
included firms in the industry in each year. Table 1 lists tensen (1992a,b) uses megabytes of storage per square
the variables and data sources used in the analysis. inch. Khanna (1995), in a study of the mainframe com-
Ultimately, our objective is to relate dynamic techno- puter industry, employs computer operation cycle time.
logical innovation to the variable of firm size. Above we Foster (1986) specifies two characteristics of an appro-
argue that this measure should be based on the output priate performance parameter. The first is that it be of
of the innovation process. Moreover, that output should value to customers; the second is that it be expressed in
be directly related to the commercial activity of the firm. terms that make sense to engineers and scientists in the
Therefore, a measure of technological innovation that is field. Both attributes are embodied in the measure of
especially appropriate would reflect the technical per- transmission rate in bits per second.
formance of the products developed by a firm and intro- The second measure we have chosen is the trans-
duced to the market. Firms whose products are more mission rate divided by the product price, which yields
technologically advanced (products showing higher tech- the measure of bits per second per dollar. We include
nical performance) are considered in this study to be this measure of product performance in our analysis for
more innovative than firms whose products are less tech- a number of reasons. The inclusion of price in this meas-
nologically advanced. Therefore, the extent to which the ure reflects an economic parameter that may provide a
technical performance of a firm’s products is higher or different set of performance indicators for the product
lower will reflect the effectiveness (or performance) of and for firms. For example, this measure may allow two
the firm’s innovation process. firms that compete in different market segments to be
The first step is to determine a measure of product compared on a more or less equal basis. A firm that
performance. In our study, the product of interest is the develops “low-end” products, but does it in such a way
computer telephone modem. We have chosen two meas- that it can offer these products for a very low price might
ures of performance. The first measure of performance be considered to be as technologically innovative as a
is relatively straightforward, namely, the data trans- firm that develops high-performance, high-priced pro-
mission rate in bits per second. The transmission rate ducts. In addition, product price has been included in
indicates number of bits of information that the modem measures of technological performance in a number of
can communicate per second over a telephone line. We other studies (Dodson, 1985; Peterson et al., 1987; Espo-
selected this measure because it is the performance of sito, 1993). This measure is also consistent with Foster’s
the technical attribute reflecting the fundamental func- (1986) criteria, discussed above, for the appropriateness
tion of the product, namely the transmission and recep- of a performance parameter.
tion of data over telephone lines. Although a modem We also emphasize that a product is included in the

Table 1
Variables, measures, and data sources

Variable Units of measure Data sources

Dependent variables
Yearly average transmission rate of new modem products Bits per second Datapro, Inc. industry reports
introduced
(AVGRATEit)
Yearly average transmission rate divided by price Bits/second/dollar Calculated from data in Datapro reports
(AVGRATE/$it)
Independent variables
COMPUSTAT, CorpTech, Ward’s
Size of firm Log2(Number of employees)
Directory
(SIZEit)
Year Year (1983=14 to 1993=24)
(YEAR)
G.N. Stock et al. / Technovation 22 (2002) 537–549 543

data set only once, in the year in which it was first intro- transmission rate or average transmission rate/dollar) of
duced. Our view is that focusing on new products pro- products introduced by firm i in year t, SIZEit=firm size
vides a better reflection of a firm’s technological capa- (log2 of number of employees) for firm i in year t,
bilities and decisions. It is very likely that an older YEAR=time variable (year), and
product that has been on the market for many years SIZE∗YEAR=interaction between firm size and time.
would receive very little consideration from a firm’s R& The regression equation can be rewritten in the fol-
D department. In addition, when price is considered, lowing manner:
older products may be affected by learning curve or mar-
PERFit⫽b0⫹b1SIZEit⫹(b2⫹b3SIZE)YEAR
keting considerations that have little to do with a firm’s
technological development capabilities. If b3 is statistically significant, then there is evidence
Having identified appropriate measures of product that there is a relationship between the rate of change in
technical performance, we can then construct a measure technological performance and firm size. If b3 is posi-
of firm innovation performance. In our case, we have tive, then the slope would be greater, and we would con-
chosen to employ the simple average of the performance clude that firm size is positively related to dynamic inno-
of the products introduced by each firm in each year.3 vation. Conversely, if b3 is negative, then the slope of
The average product performance provides a composite the linear equation relating performance and time will
measure of the performance of the products introduced be lower with increasing firm size, and we would con-
by the firm. Dynamic innovation performance is then the clude that firm size is negatively related to dynamic
rate of change in this yearly firm innovation measure. innovation. Therefore, our research hypothesis would be
Firm size is measured by the logarithm (base 2) of the supported if the sign of the b3 coefficient is positive. To
number of employees in the firm. Taking the logarithm provide some additional insight into the analysis, we also
reduces the skewness in the firm size distribution. We tested variations on this basic model. The details of this
used the logarithm to the base 2 to aid in the interpret- additional analysis are presented later in the discussion
ation of the results. The coefficient of this variable in a of the results.
regression model can be thought of as the change in the In addition, we used a fixed effects model to control
dependent variable associated with a doubling in firm for the portion of the dependent variable that is “fixed”
size. in time. Otherwise, parameter estimates could be biased.
The approach we used to estimate the fixed effects model
3.2. Data analysis was to define a dummy variable for all but one firm in
the sample, which yields a regression model with a sep-
Our objective is to relate technological innovation arate intercept for each firm. This type of model assumes
over time to firm size. To investigate this relationship, that the effects of the variables of interest (the interaction
we develop a number of regression models where tech- of size and time) affect all firms in the same way and
nological performance is the dependent variable, and that only the intercepts are different (Johnston and
firm size and time are the independent variables. In parti- DiNardo, 1997).
cular, we would like to see whether firm size has a stat-
istically significant effect on the relationship between
performance and time. The general approach is described 4. Results
here; detailed descriptions of the specific regression
models will be provided below in the section reporting 4.1. Descriptive statistics
the results of the analysis.
The general form of the regression model is shown We initially began with a data set that covered the
below: period of 1974–1993. This sample included 1767 distinct
new products. The technical specifications of these indi-
PERFit⫽b0⫹b1SIZEit⫹b2YEAR⫹b3(SIZE∗YEAR)
vidual products were used to calculate a total of 595
where PERFit=Innovation performance (either average observations. However many of these firms are privately
held, and therefore in many cases, data for firm size are
not available. This restriction reduced the sample to a
3
For example, suppose a firm introduces three new modem pro- total of 306 observations. In addition, for some products,
ducts in a particular year. One has a performance of 1200 bits per price was not reported in the data, so the sample when
second (bps); one has a performance of 2400 bps; and the third has a transmission rate/price was included consisted of 291
performance of 4800 bps. The yearly firm performance measure would observations.
be the average of these three product performance measures:
As shown in Figs. 1 and 2, the period of time from
Firm performance⫽(1200⫹2400⫹4800)/3⫽2800 bps 1983 to 1993 exhibited rapid change in the technical per-
The same approach would be used to calculate the yearly firm perform- formance of the products introduced by the firms in this
ance for the bps/$ product performance measure. industry. In contrast, it is apparent that firm performance
544 G.N. Stock et al. / Technovation 22 (2002) 537–549

Fig. 1. Average transmission rate vs year.

Fig. 2. Average transmission rate/price vs year.

does not change a great deal for either measure until ship between firm performance and year, reflecting the
approximately 1983. Because we are concerned with upward movement in technical performance over time
technological change and dynamic innovation over time, for modems. There is also a statistically significant inter-
we decided to limit our analysis to the years 1983–1993. action between firm size and year, indicating that there
In addition, data for firms that appeared in only one year is a significant relationship between firm size and tech-
were also deleted, because the idea of innovation over nological innovation over time. Moreover, the interac-
time obviously is not applicable for those firms. The tion coefficient in both models is negative, which indi-
result of limiting the data set in this way was to reduce cates that the rate of technological change decreases with
the sample to a set of 174 observations (167 observations increasing firm size. However, the coefficient for the
for the performance measure of transmission rate/price). main effect of firm size was not statistically significant.
There are a total of 44 companies in this data set. Table To aid in interpreting these regression results, they are
2 shows minimum, maximum, mean, and median values shown below in the rewritten form introduced above.
for the data and variables in this final sample. Table 3 Because we are interested in how firm size affects the
shows correlations between variables in the sample. innovation over time, we ignore the intercept and
dummy variables, as well as the non-significant main
4.2. Regression results effect term for firm size.
AVGRATE⫽(1978.2⫺50.5 SIZE) YEAR
Several regression models were estimated using the
approach outlined above. Table 4 shows the results of AVGRATE/$⫽(3.088⫺0.110 SIZE) YEAR
the basic regression model for both performance meas- What these two models show is that the slope of the
ures. In both models, there is a strong positive relation- performance versus year “line” is smaller for larger firms
G.N. Stock et al. / Technovation 22 (2002) 537–549 545

Table 2
Descriptive statistics

Variable Minimum Maximum Mean Standard deviation

Avg. transmission rate (bits/s) 300 28,800 5717 4494


Avg. transmission rate/price
0.510 37.399 8.009 6.828
(bits/s/$)
Log2(employees) 3.322 18.622 9.484 4.279
(10)a (403,500)a (716)a
Year 14 24 19.046 2.774

a
The numbers in parentheses are the actual number of employees corresponding to the logarithm.

Table 3
Correlations

Variable 1 2 3 4

1 Avg. transmission rate 1.0


2 Avg. transmission rate/price 0.611***a 1.0
3 Log2(employees) 0.097 ⫺0.245** 1.0
4 Year 0.694*** 0.730*** ⫺0.132 1.0

a
*p⬍0.05; **p⬍0.01; ***p⬍0.001.

Table 4 3000); the first quartile value for SIZE is 6.322


Regression results (corresponding to an actual number of employees of 80).
Independent variable Dependent variable Entering those values into the equations above yields the
following linear relationships:
AVGRATE AVGRATE/$ SIZE=11.551 (corresponding to 3000 employees)
Firm dummy variables AVGRATE =[1978.2−(50.5)(11.551)] YEAR
INTERCEPT ⫺33675*** a
⫺37.977*** =1394.9 YEAR
(5975) (8.082)
SIZE 635.8 1.054 AVGRATE/$ =[3.088−(0.110)(11.551)] YEAR
(544.1) (0.783)
YEAR 1978.2*** 3.088*** =1.817 YEAR
(279.6) (0.378)
SIZE*YEAR ⫺50.5* ⫺0.110**
(23.0) (0.031) SIZE=6.322 (corresponding to 80 employees)
R2 0.716 0.788 AVGRATE =[1978.2−(50.5)(6.322)] YEAR
a
*p⬍0.05; **p⬍0.01; ***p⬍0.001. Standard errors are shown in =1658.9 YEAR
parentheses.
AVGRATE/$ =[3.088−(0.110)(6.322)] YEAR
=2.393 YEAR
than for smaller firms. Recall that the SIZE variable is
log2 of the number of employees in the firm. Consider This example shows that the expected rate of change in
two firms, Firm A and Firm B. Firm A has twice as technical performance (for either measure) is substan-
many employees as Firm B, so the value of SIZE for tially higher in the smaller of the two firms.
Firm A would be exactly 1.0 unit greater than the value Additional evidence of the higher levels of dynamic
of SIZE for Firm B. From the regression results shown performance over time for smaller firms is provided by
above, the expected rate of change in average trans- another approach to this analysis. Note from Table 3 that
mission rate for Firm A would be 50.5 (bits/second)/year there is a very weak, and in fact non-significant, relation-
less than for Firm B. Similarly, the expected rate of ship between firm size and time. We took advantage of
change in average transmission rate/price would be the relative time-invariance of size to divide the sample
0.110 (bits/second/$)/year less for Firm A than for into two sub-samples. One group comprised firms whose
Firm B. average size over the time frame of the study was above
Another example presents an even clearer distinction. the median SIZE of 8.274 (corresponding to 310
The third quartile value for SIZE is 11.551 employees), and the other comprised firms whose aver-
(corresponding to an actual number of employees of age size was less than or equal to the median value. We
546 G.N. Stock et al. / Technovation 22 (2002) 537–549

then estimated separate regressions for each of the two cess. Indeed, research in this area is often explicitly
groups, again using a fixed effects model (Kleinbaum et characterized as investigating whether there are econom-
al., 1988). The results of these two regressions are pro- ies of scale in innovation. The concept of “economies of
vided in Table 5. Examination of these results shows that scale” by definition examines the relationship between
the rate of change in firm performance was quite a bit cost and size. Our research takes a qualitatively different
greater in the small firm subgroup for both perform- point of view. We examine the relationship between firm
ance measures. size and the effectiveness of the innovation process over
time (as reflected by the rate of change in the technical
performance of products developed over time). There-
5. Implications and directions for future research fore, our interpretation of these results is not that they
are necessarily a contradiction of the evolutionary frame-
The most immediate implication of these findings was work; rather, they may simply address a different
the lack of support for our research hypothesis. This research question. In fact, it may be that larger firms
hypothesis, following the logic of the evolutionary were more efficient over time in developing new pro-
framework of Nelson and Winter (1982) and the empiri- ducts than smaller firms, even if these products were not
cal results of Methe (1992), predicted that there would as technically advanced. The next question, which would
be a positive relationship between firm size and dynamic be the subject of future research, would be whether
innovation performance. Not only did our results fail to effectiveness (as we have conceptualized it here) or
support this expectation, they in fact found a negative efficiency of the dynamic innovation process is more
relationship between firm size and dynamic innovation. important from a competitive perspective.
Smaller firms showed a significantly higher rate of Another possible explanation for why our results dif-
change in product performance, on average, than did fer from the evolutionary framework suggests a second
larger firms. Our results therefore provide evidence for direction for future research. Nelson and Winter (1982,
the argument that smaller firms are more technologically p. 279) acknowledge that their model (and other models
innovative, at least in a dynamic sense. of Schumpterian competition) fail to include the possible
This study provides a number of contributions to the effects of “bureaucratic control structures” found in large
literature in technology and innovation. The relationship firms. These and other organizational variables that dif-
between size and innovation has long been an important fer among large and small firms may also provide an
area of research in the literature on technology and inno- explanation for our results. Therefore, it may not be size,
vation. There is a good deal of literature examining firm per se, that is responsible for the difference in innovation
size and innovation, and there is a good deal of literature performance; it may be that organizational character-
investigating innovation within a dynamic context, but istics often found in small firms are the determining fac-
research that empirically considers the explicit relation- tor. In other words, can a large firm “act small” in the
ship between firm size and dynamic technological inno- innovation process? One way to address this question
vation is scarce. In fact, what research does exist differs would be to study dynamic innovation in entrepreneurial
from our results, as noted above. divisions or joint ventures of large firms.
Although we cannot provide a definitive explanation One direction for future research would therefore be
for this apparent contradiction, we can provide a reason- the development of a conceptual model that explicitly
able first step in this direction. As we noted above, the includes organizational variables of this sort. Further,
traditional economic perspective on the Schumpeterian such a model would address the possible causal relation-
hypothesis addresses the relationship between firm size ships between firm size and dynamic technological inno-
and the efficiency, or productivity, of the innovative pro- vation. Research in this area would include the develop-

Table 5
Regressions of performance versus year for large and small firms

AVGRATE AVGRATE/$

Small firms Large firms Small firms Large firms

Firm dummy variables


INTERCEPT ⫺31213***a ⫺18048*** ⫺30.447*** ⫺19.000***
(3139.5) (3045.8) (6.245) (3.196)
YEAR 1737.1*** 1260.1*** 2.367*** 1.537***
(139.1) (134.9) (0.277) (0.143)
R2 0.811 0.638 0.767 0.774

a
*p⬍0.05; **p⬍0.01; ***p⬍0.001. Standard errors are shown in parentheses.
G.N. Stock et al. / Technovation 22 (2002) 537–549 547

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drugs. Journal of Industrial Economics 36, 83–95. Gregory N. Stock is Assistant Professor in the College of Business at
Johnston, J., DiNardo, J., 1997. Econometric Methods. McGraw-Hill, Northern Illinois University. His research has focused on technology and
supply chain management. His recent articles have examined technology
New York.
transfer, manufacturing technology implementation, product development,
Kamien, M.I., Schwartz, N.L., 1975. Market structure and inno- and new organizational approaches to supply chain management and have
vation — a survey. Journal of Economic Literature 13, 1–37. been published in journals such as IEEE Transactions on Engineering
Kamien, M.I., Schwarz, N.L., 1982. Market Structure and Innovation. Management, the Journal of Operations Management, the Journal of High
Cambridge University Press, Cambridge. Technology Management Research, Production and Inventory Manage-
Khanna, T., 1995. Racing behavior: Technological evolution in the ment Journal, and the International Journal of Operations and Production
high-end computer industry. Research Policy 24, 933–958. Management. Prior to beginning his academic career, Dr. Stock spent sev-
Kleinbaum, D.G., Kupper, L.L., Muller, K.E., 1988. Applied eral years in industry as a design engineer in high technology industries
such as computer graphics and data communications. He has B.S. and
Regression and Other Multivariable Methods. PWS-Kent Pub-
M.S. degrees in electrical engineering from Duke University and a Ph.D.
lishing Company, Boston, MA. degree in operations management from the University of North Carolina.
Koretz, G., 1998. Downsizing’s painful effects. Business Week 3573 Dr. Stock has taught undergraduate and graduate courses in operations
(13 April), 23. management, supply chain management, and technology management at
Kupfer, A., 1998. MCI WorldCom: It’s the biggest merger ever. For- a variety of institutions, including Northern Illinois University, Arizona
tune 137 (8), 118–128. State University, and the China–Europe International Business School.
Lichtenberg, F.R., Siegel, D., 1991. The impact of R&D investment
on productivity—new evidence using linked R&D–LRD data. Noel P. Greis received an A.B. degree in mathematics from Brown Uni-
Economic Inquiry 29, 203–228. versity, and M.S., M.A., and Ph.D. degrees in engineering from Princeton
Loomis, C.J., 1999. Citigroup: Scenes from a merger. Fortune 139 (1), University. Dr. Greis is Director of the Center for Logistics and Global
76–88. Strategy in the Kenan Institute of Private Enterprise and Adjunct Assistant
Mansfield, E., 1980. Basic research and productivity increase in manu- Professor of Operations, Technology, and Innovation Management in the
facturing. American Economic Review 70, 863–873. Kenan–Flagler Business School at the University of North Carolina at
Methe, D.T., 1992. The influence of technology and demand factors Chapel Hill. Dr. Greis was previously a Member of the Technical Staff
on firm size and industrial structure in the DRAM market — 1973– at AT&T Bell Laboratories and Bell Communications Research. Her
research interests focus on global logistics and the management of tech-
1988. Research Policy 21, 13–25.
nology, and her work has been published in IEEE Transactions on Engin-
Narin, F., Noma, E., 1987. Patents as indicators of corporate techno- eering Management, Research Policy, Decision Sciences, California Man-
logical strength. Research Policy 16, 143–155. agement Review, and the International Journal of Operations and
Nelson, R.R., Winter, S.G., 1982. An Evolutionary Theory of Econ- Production Management.
omic Change. Belknap-Harvard Press, Cambridge, MA.
Pavitt, K., Robson, M., Townsend, J., 1987. The size distribution of
William A. Fischer is a Professor of Technology Management at IMD.
innovating firms in the UK: 1945–1983. Journal of Industrial Eco- He received a D.B.A. degree from George Washington University. His
nomics 35, 297–316. principal teaching and research interests involve the management of tech-
Peterson, D.K., Miller, P.E., Fischer, W.A., Zmud, R.W., 1987. Tech- nology, including the management of the creative processes within R&D;
nology measurement and the appraisal of information technology. the creation and coordination of an international technology presence; and
Technological Forecasting and Social Change 42, 251–259. technology transfer. Dr. Fischer has worked in the steel industry, the US
G.N. Stock et al. / Technovation 22 (2002) 537–549 549

Army Corps of Engineers, and has also worked as a consultant on agencies such as the World Health Organization. In addition to IMD, he
R&D/technology issues in such industries as: pharmaceuticals, telecom- has been on the faculties of Clarkson University and the University of
munications, textiles and apparel, and packaging. Additionally, he has North Carolina, and was the Executive President and Dean of the China–
served as a consultant to a number of government and international-aid Europe International Business School.

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