Can Small Firms Be the Leaders of Innovation? Finding the Determinants of Product and Process Innovation

Francisco Maria da Silva Passos Moita

Key information

Authors:

Francisco Maria da Silva Passos Moita (Francisco Maria da Silva Passos Moita)

Supervisors:

Tiago Miguel Pinheiro Fonseca; Hugo Miguel Fragoso de Castro Silva (Hugo Miguel Fragoso de Castro Silva)

Published in

01/20/2021

Abstract

The determinant of innovation firm size has fostered an intensive debate in the literature reaching little consensus. This schism is further hindered when we separate innovation into product and process. Moreover, the usual absence of joint innovation categories makes studies fall short in analysing the interrelationship between product and process innovations. Thus, we carry out an empirical study on the innovation-firm size relationship considering the choices of engaging in product, process, or in both innovations. Then, from the exploration-exploitation standpoint, we tackle the assumption that joint innovation strategies increase innovation performance by analysing potential trade-offs faced by firms that follow both types simultaneously and explore how they vary with firm size. Using the Portuguese Community Innovation Survey (CIS) and the Integrated Business Accounts System (SCIE), between 2008 and 2018, we deploy two econometric models. The first, a multinomial probit model, finds that small firms have relative advantage on product innovation, medium on process innovation, and large firms on the joint category. Our second analysis deploys Heckman’s selection model and finds that large firms benefit the most from joint innovation strategies, with small firms following. When we disaggregate firm size into a numerical variable, we learn that firms employing between 276 and 3,055 workers have contracted innovation performances. Certainly, our work provides sustained evidence that joint innovation strategies must be further researched to broaden policymakers’ agenda towards its determinants, benefits, and downsides. Likewise, we cast light on the role of firm size in mastering possible trade-offs between product and process innovations.