Firm growth and innovation

David B. Audretsch • Alex Coad • Agustı Segarra

Accepted: 1 December 2013

� Springer Science+Business Media New York 2014

Abstract In recent years, there has been an increase

in empirical and theoretical work that addresses the

role of innovation as one of the main sources of firm

growth. The purpose of this special issue is to

strengthen the role played by innovation as a deter-

minant of firm growth. Despite the emergence of a vast

empirical literature on whether innovative firms grow

more quickly in terms of sales and employees, a

number of crucial questions and answers remain.

While a large number of applied papers observe a

positive link between innovation and firm growth, the

complexity of R&D activities, together with the

diversity of innovation strategies and the multiplicity

of growth modes, requires a multidimensional

approach to examine the contribution of innovations

on firm growth. To shed light on the link between firm’

growth and innovation sources, we organized a

meeting of leading scholars of firm’ growth and

innovation. The papers of this special issue were

presented at the workshop on ‘Firm growth and

innovation’ held on 28 and 29 June, 2012, in

Tarragona, Spain. The papers that compose this

special issue deal in depth with innovation activity,

firm growth and the interaction between firm growth

and innovation.

Keywords Firm growth � Innovation �Persistence � R&D

JEL Classifications L11 � L25 � L26 � O31

1 Introduction

In recent years, there has been an increase in empirical

and theoretical work that addresses the role of

innovation as one of the main sources of firm growth.

Joseph Schumpeter’s framework was the starting point

of the interpretation of firm dynamics as an evolu-

tionary process related to the introduction of new

innovations to the market. The Schumpeterian inter-

pretation of firm growth is based on a process of

creative destruction where firms have a capacity to

D. B. Audretsch

Institute for Development Strategies, Indiana University,

Bloomington, IN, USA

A. Coad

SPRU – Science and Technology Policy Research, BMEc,

University of Sussex, Jubilee Building 379, Falmer,

Brighton BN1 9SL, UK

A. Coad

Department of Business and Management, Aalborg

University, Fibigerstræde 4, 9220 Aalborg Ø, Denmark

A. Coad

RATIO Institute, P.O. Box 3203, 10364 Stockholm,

Sweden

A. Segarra (&)

Research Group of Industry and Territory, Department of

Economics – CREIP, Universitat Rovira i Virgili, Av.

Universitat, 1, 43204 Reus, Spain

e-mail: agusti.segarra@urv.cat

123

Small Bus Econ

DOI 10.1007/s11187-014-9560-x

introduce new products and processes to the market. In

the Schumpeterian conception markets are not in static

equilibrium as a result of the interaction of economic

agents (firms and consumers) who maximize their

objective functions (profits and utilities). In contrast,

markets are the result of a dynamic process where

heterogeneous firms interact and compete introducing

new products or processes. The main contribution of

this framework is that the markets are interpreted as

the field of play for heterogeneous firms and they

become agents of change through their interaction. In

this framework, entrepreneurial activity appears as

one of the primary drivers of industrial dynamism,

economic development and growth.

In his influential book Theorie der Wirtschaftlichen

Entwicklung (1912, the second edition of which was

published as The Theory of Economic Development,

1934), Joseph Schumpeter tried to develop an entirely

new economic theory based on change as opposed to

equilibrium. In this approach Schumpeter advanced

two relevant topics. First, innovation is located at the

heart of economic development and facilitates aggre-

gate economic growth; and second, innovations

require entrepreneurship. Schumpeter’s schema, built

around the innovative entrepreneur, drew a clear

connection between innovation incentives at the firm

level and the aggregate growth of the economy.

Sometimes firms find few incentives to implement

innovations and generate jobs for scientific employ-

ees, whereas governments play vital roles to fill this

gap (Scherer 1992). Hence, the Schumpeterian frame-

work facilitates the understanding of the process of

firm entry, innovation incentives and their effects on

economic growth.

However, the development of a formal theory

comprising the main Schumpeterian ideas has not

been an easy task. Some scholars adopted an evolu-

tionary theoretical approach in order to overcome the

limitations of the dominant neoclassical theory. The

birth of modern Schumpeterian growth theory started

in the 1980s with the presentation of the general

evolutionary process of creative destruction. At that

point the first evolutionary theories were developed,

highlighting the work of Nelson and Winter (1982)

and Dosi (1982), among others. For these scholars, the

innovation process is the main cornerstone of

increases in productivity and economic growth. Nel-

son and Winter’s evolutionary model considers the

Schumpeterian framework as an engine of change, and

they are interested in studying the differing patterns

across industries and firms in terms of their innovation

dynamics. Their innovative contribution has been an

important source of inspiration for subsequent work on

‘knowledge-based firms’, ‘technological regimes’,

‘industrial dynamics’, and other crucial topics (Fag-

erberg et al. 2006).

Thereafter, in the endogenous growth models

developed initially by Romer (1990) and Lucas

(1993), knowledge is one of the primary drivers on

growth, because of its strong propensity, as Arrow

(1962) shows, to spill over from the knowledge-

creating firm to other third-party firms accessing that

knowledge at low cost (Acs et al. 2013). While these

models assume that knowledge spills over automati-

cally, for others knowledge flows are impeded or

limited by what they term as the ‘knowledge filter’

(Audretsch et al. 2006; Braunerhjelm et al. 2010).

More recently, attention has focused on the indi-

vidual characteristics that explain why some persons

choose to become entrepreneurs while others do not

(Acs and Audretsch 2010). According to the ‘knowl-

edge spillover theory of entrepreneurship,’ attention

has focused on the environmental conditions that can

influence the decision to become an entrepreneur (Acs

et al. 2013). The knowledge spillover theory of

entrepreneurship identifies new knowledge as a source

of entrepreneurial opportunities, and suggests that

entrepreneurs play an important role in commercial-

izing new knowledge developed in large incumbent

firms or research institutions (Qian and Acs 2013).

In this perspective, the theory of entrepreneurship

not only serves as a conduit for the spillover of

knowledge, but also serves to ensure innovative

activity and enhanced economic performance (Acs

et al. 2009), and entrepreneurship capacity depends

not only on ordinary human capital, but more impor-

tantly also on creativity embodied in creative individ-

uals and diverse urban environments that attract

creative classes (Audretsch and Belitski 2013).

When scholars try to disentangle the main drivers of

firm growth, it provokes an intense debate, highlight-

ing the scarce consensus between empirical contribu-

tions. These mixed empirical results demonstrate the

limitations of the financial and industrial market to

select and discriminate between innovative and effi-

cient firms in contrast to non-innovative and less

efficient firms. In fact, contemporary markets do not

appear to be very effective selectors for delivering

D. B. Audretsch et al.

123

rewards and punishments according to differentials in

firms’ efficiencies. In the same way, contemporary

financial and industrial markets are not able to

undertake market selection processes that select the

winners and losers in accordance with the innovative

effort and efficiency of firms (Demirel and Mazzucato

2009).

2 The complexity of firm growth

The nature of firm growth is a heterogeneous, complex

and dynamic process that involves economic, social

and cultural factors (Delmar et al. 2003; Wong et al.

2005). Part of this complexity is due to different

conceptions of firm growth. On the one hand, scholars

consider four different types of firm growth: organic

growth, creation of new firms, concentration of exist-

ing firms (mergers, acquisitions) and growth through

innovation and diffusion of new products and pro-

cesses (Delmar et al. 2003). On the other hand, analysis

of firm growth may have two faces: quantitative (‘how

much’) and qualitative (‘how’) (Coad 2009; McKelvie

and Wiklund 2010). While the former may usually be

investigated by econometric analyses of databases, the

latter is more complex, requiring detailed information

on many dimensions of a firm’s activity.

We summarize four main justifications of the

complexity of growth at the firm level. First, the

indicators used to measure growth are not neutral with

respect to empirical results. Second, firm growth is not

only explained with traditional observable variables

such as location, industry, size, age or capital, but it is

also associated with specific unobservable factors such

as a firm’s managerial capital or the skills of its

workforce. Third, innovation performance differs

between firms and its impact on firm growth varies

in time and space. Fourth, the differences in firms’

profiles—location, market position, public support,

etc.—impact with varying intensities on firm growth.

When we consider the empirical drivers of firm

growth, there is hardly any consensus. The difficulties

of predicting the determinants of firm growth are not

only related to heterogeneity at the firm level, but are

also associated with the low persistence of growth

rates over time.

Some scholars explain the complexity that

researchers find when analyzing the link between

innovation and growth at the firm level by pointing out

that firm growth depends not only upon specific firm

characteristics, but also on external characteristics

such as location and geographical knowledge spill-

overs (Audretsch and Lehmann 2005). We can classify

the empirical papers on the patterns of firm growth into

three categories. In the first group the starting point is

the Law of Proportionate Effects proposed by Gibrat

(1931), which generated an enormous amount of

empirical studies in a large number of countries and

industries. The second group tends to consider firm

growth as a process determined by endogenous

(strategic) characteristics of the firm and not just as

an erratic process (Geroski 1999); or as being purely

driven by structural characteristics. The central focus

of this strand of the literature is the identification of

those factors which distinguish growing firms from

those which do not grow (Arrighetti and Ninni 2009).

The third group analyzes the effect of external factors

over innovation performance and firm growth and

measures the impact of external spillovers on firms’

R&D investment decisions. The main results find that

the proximity of firms that generate knowledge

spillovers produces a positive impact on firms that

are located in the cluster in terms of performance and

efficiency (Audretsch and Feldman 1996, 2003).

3 Innovation and firm growth

Today there are extensive theoretical contributions

regarding firm growth and its determinants. From the

empirical perspective the analysis regarding innova-

tion and R&D effects on firm growth are also

extensive. In general, the empirical evidence notes a

positive effect between firm growth and innovation

that differs according to firm characteristics, the nature

of market selection and the geographical environment.

For instance, Coad and Rao (2008) reveal that the

positive impact of innovative activities on firm growth

is concentrated among the fastest growing firms, while

for others it can be negative.

Recent literature offers a picture of several empir-

ical ‘stylized facts’. The empirical works about the

links between innovation and firm growth give a broad

picture across industries and countries. The relation-

ship between R&D, innovation and firm growth is not

straightforward, but is often positive—according to

surveys of the empirical evidence between innovation

and firm growth in Coad (2009), and between

Firm growth and innovation

123

innovation and productivity growth in Crepon et al.

(1998) and Ortega-Argiles et al. (2011). Firm-level

innovation can be expected to have a positive influ-

ence on sales growth or productivity growth. The

overall effect on employment growth, however, is a

priori ambiguous.

Innovation is often associated with increases in

productivity that lower the amount of labour required

for the production of goods and services. Therefore, an

innovating firm may change the composition of its

productive resources, to the benefit of machines and at

the expense of employment (Coad 2009). The inno-

vation and R&D effects over firm growth differ

according the individual firm characteristics and

strategies. When Demirel and Mazzucato (2012)

explore how innovation affects firm growth in US

pharmaceutical firms, between 1950 and 2008, they

found that the positive impact of R&D on firm growth

is highly conditional upon a combination of firm

characteristics such as firm size, patenting and persis-

tence in patenting.

Finally, the empirical literature finds some degree of

persistence in innovation and profits and less in growth

rates at the firm level. The persistence of innovation

strategies emerges from the presence of organizational

routines, sunk costs associated with R&D investments,

specialized skills of R&D staff and the diversity of

R&D projects. Relatedly, these innovation activities

impact on job creation and efficiency levels of the firm

in the medium and long term.

4 Overview of the contributions to the special issue

The purpose of this special issue is to strengthen the

role played by innovation as a determinant of firm

growth. Despite the emergence of a vast empirical

literature on whether innovative firms grow more

quickly in terms of sales and/or employees, a number

of crucial questions and answers remain. While a large

number of applied papers observe a positive link

between innovation and firm growth, the high com-

plexity of R&D activities, together with the diversity

of innovation strategies and the multiplicity of growth

modes, requires a multidimensional approach to

examine the contribution of innovations on firm

growth. Furthermore, a number of studies find no

effect of innovation on firm growth. The large amount

of scholarly research conducted during recent years

has led to a substantial body of empirical findings.

To shed light on the link between firm’ growth and

innovation sources, we organized a meeting of leading

scholars of firm’ growth and innovation. The papers of

this special issue were presented at the workshop on

‘Firm growth and innovation’ held on 28 and 29 June,

2012, in Tarragona, Spain, with David Audretsch and

Marco Vivarelli as keynote speakers. Scholars from

several countries attended the event, where they

presented their papers and discussed other colleagues’

contributions. The meeting was eclectic and the

special issue reflects the diversity of perspectives

and methodological approaches developed across

different research centers and universities.

The papers that compose this special issue deal in

depth with innovation activity, firm growth and the

interaction between firm growth and innovation.

4.1 Persistence of innovation and firm growth

Two papers examine the persistence of innovation on

firm growth from two different approaches. First, in

the paper ‘R&D, firm growth and the role of innova-

tion persistence: analysis of Finnish SMEs and large

firms’, Deschryvere (2014) analyses how the relation-

ship between R&D and firm growth varies between

continuous and occasional innovators for a sample of

Finnish firms between 1998 and 2008. He finds that

only continuous product and process innovators show

positive associations between R&D growth and sales

growth. Also the links between sales growth and

subsequent R&D growth were stronger for continuous

innovators than for occasional innovators, but only for

product innovators. Second, Triguero and Corcoles

(2014) consider the effect of the persistence of

innovation on employment in Spanish manufacturing

firms during the period 1990–2008. In their paper

‘Persistence of innovation and firm’s growth: Evi-

dence from a panel of Spanish manufacturing firms’,

they use a GMM-system estimation to study the

importance of persistence of product and process

innovation on employment growth, controlling by

potential endogeneity and unobserved firm heteroge-

neity. The empirical results indicate that process

innovation measures show a positive effect on

employment while the effect of product innovation is

positive but not significant.

D. B. Audretsch et al.

123

4.2 Innovation and heterogeneity

For a better understanding of the link between

innovation and firm growth we need to observe the

heterogeneous patterns of innovation among firms. In

general, innovation differs between industries, and

from a historical perspective innovation (especially

technological innovation) tends to cluster in waves. In

the paper ‘Why don’t all young firms invest in R&D’,

Audretsch et al. (2014) observe the different incen-

tives that young small firms have to invest intensively

in innovation. Hence, those authors analyse the factors

that may affect the decision to become a young

innovative company (YIC) or young non-innovative

company (YNIC). Their results point out the fact that

young small firms follow different paths which may be

rational decisions considering their situations. In fact,

different innovation barriers that affect the markets

where firms operate may diminish the probability of

firms to innovate.

In the paper ‘High-growth firms and innovation: an

empirical analysis for Spanish firms’, Segarra and

Teruel (2014) use the Spanish CIS database to analyze

these asymmetries of the innovation phenomenon

from two different approaches. The paper takes into

account the heterogeneous impact that R&D effort

may exert on the firm growth distribution. They

analyze the impact of internal and external R&D on

firm growth for a group of high-growth firms. Their

results show that investing in R&D increases the

likelihood of becoming a high-growth firm. Further-

more, internal and external R&D investments show

varying impacts according to the firm growth distri-

bution. Internal R&D shows a positive impact among

high-growth firms, while external R&D has a signif-

icant positive impact for firms with median growth

rates.

4.3 Measuring firm growth

One of the key determinants is to disentangle

whether innovation exerts a positive or negative

impact on employment creation. Recently the

empirical literature about the effect of innovation

on labour demand, in particular in manufacturing

firms, has greatly increased but the results are not

always conclusive. Product innovation tends to have

a positive effect on labour demand, but process

innovation tends to create a displacement effect on

labour demand in manufacturing firms (Coad and

Rao 2011).

In their work ‘Age and firm growth. Evidence from

three European countries’, Navaretti et al. (2014)

analyze firm growth in terms of employment by

considering firm growth as a size transition where

firms increase or decrease, without considering the

magnitude. For an extensive sample of European firms

the empirical results suggest that the upsizing process

is associated mainly with structural, economic and

financial characteristics of the firm.

4.4 The effect of the technological environment

on the survival chances of entrepreneurs

The technological environment in which firms operate

may affect their performance. In that sense, entrepre-

neurial firms in a more advanced technological

environment may perform better than entrepreneurial

firms in a less advanced technological environment.

Two reasons might explain this situation. First, in a

more advanced technological environment, entrepre-

neurial firms are good at exploiting knowledge

spillovers, and second, the importance of flexibility

on firm performance is greater and entrepreneurial

firms tend to be more flexible.

To that end, van Stel et al. (2014) investigate the

survival chances of small employer firms, and in

particular the influence of the technological environ-

ment on survival. Their paper ‘Investigating the

impact of the technological environment on survival

chances of employer entrepreneurs’ estimates survival

models to analyze durations as an employer entrepre-

neur, using micro panel data from EU-15 countries

drawn from the European community household panel

(ECHP). The empirical results find a positive rela-

tionship between the technological environment and

survival chances of employer entrepreneurs. In addi-

tion, this analysis also suggests that a selection effect

may be part of the explanation in the sense that, in a

more advanced technological environment, relatively

more ‘high-quality’ individuals opt to be entrepre-

neurs. They remark that fast-growing firms play an

important role in combatting the negative employment

effects of the crisis, but the net employment growth

during the current crisis is strongly negative in many

European countries. Hence, the positive job contribu-

tion of HGFs does not compensate for employment

losses suffered in non-high-growth firms.

Firm growth and innovation

123

4.5 Types of innovation

Traditionally, the empirical literature on the Economics

of Innovation has focussed on technological innovations

in manufacturing sectors, but since the third edition of

the Oslo Manual, the role of non-technological innova-

tion has increased across all industries and firms.

Currently, there is a lag in empirical analysis on the

impact of organizational and marketing innovation.

Two papers of this special issue tackle this subject and

its impact on firm growth. On the one hand, Hervas-

Oliver et al. (2014) in their paper ‘Process innovation

strategy in SMEs, organizational innovation and per-

formance: a misleading debate?’ analyze the determi-

nants of the introduction of process innovation for a

sample of innovative Spanish firms. In general, their

results show that process innovation depends on the

acquisition of external knowledge. On the other hand, in

their contribution ‘Processes of firm growth and diver-

sification: theory and evidence’, Coad and Guenther

(2014) analyse the impact of innovations by considering

diversification as being closely related to product

innovation. Drawing on Penrose’s theory of the growth

of the firm, they hypothesize that employment growth

occurs before diversification, while growth of sales and

assets occurs at the time of diversification and after-

wards. Empirical evidence provides tentative support

for the hypotheses.

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Papers from the workshop

Audretsch, D. B., Segarra, A., & Teruel, M. (2014). Why not all

young firms invest in R&D. Small Business Economics.

doi:10.1007/s11187-014-9561-9

Coad, A., & Guenther, C. (2014). Processes of firm growth and

diversification: Theory and evidence. Small Business

Economics. doi:10.1007/s11187-014-9566-4

Deschryvere, M. (2014). R&D, firm growth and the role of

innovation persistence: analysis of Finnish SMEs and large

firms. Small Business Economics. doi:10.1007/s11187-

014-9559-3

Hervas-Oliver, J. L., Sempere-Ripoll, F., & Boronat-Moll, C.

(2014). Process innovation strategy in SMEs, organiza-

tional innovation and performance: a misleading debate?

Small Business Economics.doi:10.1007/s11187-014-

9567-3

Navaretti, G. B., Castellani, D., & Pieri, F. (2014). Age and firm

growth. Evidence from three European countries. Small

Business Economics. doi:10.1007/s11187-014-9564-6

Segarra, A., & Teruel, M. (2014). High-growth firms and

innovation: An empirical analysis for Spanish firms. Small

Business Economics. doi:10.1007/s11187-014-9563-7

Triguero, A., Cuerva. M., & Corcoles, D. (2014). Persistence of

innovation and firm’s growth: Evidence from a panel of

SME and large Spanish manufacturing firms. Small Busi-

ness Economics.doi:10.1007/s11187-014-9562-8

van Stel, A., Millan, J. M., & Roman, C. (2014). Investigating

the impact of the technological environment on survival

chances of employer entrepreneurs. Small Business Eco-

nomics. doi:10.1007/s11187-014-9565-5

Firm growth and innovation

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