How Innovation Really Works: Using the Trillion-Dollar R&D Fix to Drive Growth

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MISCONCEPTION 1: Small Companies Are More Innovative

Many people believe small entrepreneurial companies are the real source of innovation and economic growth in the economy. In fact, this is the main message in Gary Shapiro’s book Comeback: How Innovation Will Restore the American Dream.¹ Ironically that view conflicts with that of the economist most often associated with entrepreneurship, Joseph Schumpeter. Schumpeter argued instead that large companies are the major engine of economic growth.²

THE COMPANY SIZE DEBATE

Large Company Advantage

Schumpeter’s argument relied on two advantages of large size. The first advantage is scale economies. Since R&D is a fixed cost, the amortized cost of R&D per unit decreases as a company sells more units. ...