Few people are aware of how much money and effort small businesses invest in innovative activity. Because Apple’s efforts to create the latest i-device or Merck’s investment in drug development are more newsworthy than the innovative activity of businesses that few people have heard of, most people don’t know how focused on research and development (R&D) small businesses in certain industries are.
True, most small businesses operate in industries, such as construction, professional services, or retail, in which investment in R&D is not an important part of their activities. But in R&D-intensive industries, small businesses devote much more of their resources to R&D than large companies.
A recent report by Lawrence Rausch summarizing analysis by the National Science Foundation shows that smaller companies that conduct R&D spend a greater percentage of their sales on R&D than larger R&D performing companies. As the figure below (which I created from the data Rausch reports) shows, companies with between 5 and 50 employees that conduct any R&D at all spend more than 15 percent of their sales revenue on that activity, as compared to less than 4 percent for companies with more than 5,000 employees.
R&D Intensity by Firm Size in 2007
Source: National Science Foundation, Science and Engineering Indicators
We see similar patterns if we look at employment rather than R&D expenditures. As Rauch explains, small firms that conduct R&D have a greater share of scientists and engineers among their employees than large R&D active companies. As the figure below (which I again created from the data Rausch reports) shows, in 2007, businesses with 5-24 employees that conducted R&D devoted a whopping one fourth of their total employment to scientists and engineers, as compared to less than 5 percent at companies with more than 25,000 workers.
Scientists and Engineers as a Percentage of Total Employment at Businesses Conducting R&D, 2007
Source: National Science Foundation, Science and Engineering Indicators
Moreover, Rausch’s report explains, over the 2003 through 2007 period, small businesses increased their investment in innovation more than large businesses. Over those five years, small firms increased their R&D spending by 40.2 percent as compared to 32.8 percent at large firms. And they increased their employment of scientists and engineers 14.8 percent as opposed to 8.4 percent at large firms.
So the next time you read a story in the newspaper about some giant company’s latest R&D project, remember that small companies you’ve never heard of are devoting even more of their resources to R&D. In industries where R&D matters to success, small companies are the ones betting the most on coming up with technological innovations.
Of course, when those little firms succeed, they sometimes become the big companies whose R&D projects you then read about in the paper.
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Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.