Edited by David B. Audretsch, Oliver Falck, Stephan Heblich and Adam Lederer
Chapter 22: Small Firms and Innovation
Simon C. Parker This chapter discusses the role of small firms in the process of innovation. The chapter advances theoretical arguments about the role of small firms in the innovative process, before reviewing evidence about their innovative contribution. Although it is common nowadays to talk about ‘entrepreneurship’ rather than ‘small firms’, most new ventures start small, so for most practical purposes the set of new firms roughly approximates the set of small firms. The focus on small versus large firms (rather than new versus incumbent firms) is not just a historical legacy; it also reflects data availability, since data on innovation are more abundant when small firms rather than individual entrepreneurs are the unit of analysis. Few nascent entrepreneurs innovate very much, which is reflected for example by the fact that the Panel Study of Entrepreneurial Dynamics (PSED) devotes virtually no attention to the innovation issue (Gartner et al., 2004). Innovation, deemed by Joseph Schumpeter to be a central aspect of entrepreneurship, has long attracted policy interest. Arguably, policy-makers are not chiefly interested in innovation as an end in itself, but more as a means to an end – or more precisely, several ends, such as innovation, wealth creation and growth. For example, it is known that industries with high rates of entry by small firms tend not only to be more innovative, but also enjoy high rates of productivity growth on average (Geroski and Pomroy, 1990; Cosh et al., 1999). And more innovative new entrants tend to enjoy superior post-entry...
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