Challenges for Innovation Due to Firm Size: The Case of Brazilian Industrial Firms

Challenges for Innovation Due to Firm Size: The Case of Brazilian Industrial Firms

Graziela Ferrero Zucoloto (Instituto de Pesquisa Econômica Aplicada, Brazil) and Mauro Oddo Nogueira (Instituto de Pesquisa Econômica Aplicada, Brazil)
DOI: 10.4018/978-1-5225-0135-0.ch015
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Abstract

This chapter analyses the innovative capacity of small firms compared to medium and large firms in Brazilian industry. It presents the Schumpterian debate regarding the role of small and large firms as inductors of innovation, including a brief discussion about the barriers and opportunities for innovation faced by small businesses, particularly in developing countries. The empirical analysis is based on the Brazilian Innovation Survey, which is used to compare the innovative efforts undertaken by small, medium and large enterprises. Its main findings are that in Brazil, large companies predominate in the creation of new products and processes, while smaller perform more effort than those in innovations associated with processes modernization. However, from the observation of the industry sectorial structure, it identifies that in high-tech sectors, Brazilian small companies outperform large in efforts in R&D.
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A Review Of Theoretical And Empirical Research

Micro, small and medium enterprises (MSMEs) account for a significant part of employment, production and sales in several countries. In the European Union, for instance, MSMEs represent 99 percent of industry and account for more than 70 percent of employment (Nieto & Santamaria, 2010). In the newly industrialized countries (NICs), MSMEs generally employ the largest percentage of the workforce, are responsible for income generation opportunities and, at least in the case of East Asia and India, MSMEs contribute with a substantial share of the manufactured exports. In China and India, they are responsible for most part of total businesses, gross industrial output value, sales revenues and employed people (Singh et al., 2009).

Although their economic and social relevance is consolidated, the role of MSMEs on innovative performance is still controversial. The ancient Schumpeterian debate over how firm size relates to the ability and propensity to innovate continues to arouse controversy today (Nieto & Santamaria, 2010).

In his initial phase - known as Schumpeter Mark I - the author argued that radical innovations would be promoted by small businesses, through the action of entrepreneurs who would break with the prevailing technological paradigms (“creative destruction”). More than the generation of innovations itself, the economic development would result of their diffusion through the environment. Afterward - as Schumpeter called on stage Mark II - the author highlighted the central role of large firms in the development of new technologies and, consequently, of economic growth, in a processes known as “creative accumulation”.

As mentioned by Tether (1998), the contrasting hypotheses of Schumpeter have been widely but inconclusively examined. The existence of such a large literature is indicative of both the importance of the theme and the inconclusive nature of the results. Interpretation is especially difficult because of the different indicators used to evaluate the innovative performance, such as R&D expenditures, R&D employment, patents and others, suggesting different relationships between firm-size and innovative performance.

Key Terms in this Chapter

Organizational Innovation: Implementation of a new organizational method in the firm's business practices, in the organization of its workplace or in its external relations, to improve the use of knowledge, workflows efficiency or quality of goods or services.

Brazilian Innovation Survey (Pintec): It is engaged in the construction of indicators of innovation activities in companies. It seeks to deepen the theme of innovation producing information on aspects such as spending on innovation activities; funding sources of these expenditures; impact of innovations on business performance; information sources used; cooperative arrangements; the role of government incentives; obstacles encountered to innovation activities; organizational and marketing innovations, and use of biotechnology and nanotechnology.

Product Innovation: Is one whose fundamental characteristics (technical specifications, components and materials, incorporated software, functions or intended uses) differ significantly of all products previously produced by the company. The product innovation may be progressive, by a significant enhancement of previously existing product, whose performance was substantially increased or enhanced.

Process Innovation: Introduction of new or significantly improved production methods or delivery of products. At industry, methods of production involve changes in techniques, machinery, equipment and software used in the process of transforming inputs into outputs.

Schumpterian Debate: The role of small and large firms in the innovation development. In his initial phase, the author argued that radical innovations would be promoted by small businesses, through the action of entrepreneurs who would break with the prevailing technological paradigms (“creative destruction”). Afterward, the author highlighted the central role of large firms in the development of new technologies and, consequently, of economic growth, in a processes known as “creative accumulation”.

Acquisition of Machinery and Equipment: It includes the acquisition of machinery, equipment and hardware to implement new or substantially improved products or processes.

R&D Activities: It comprises creative work undertaken on a systematic basis in order to increase the knowledge to develop new or substantially improved products or processes. The design, construction and the prototype tests are often the most important phase of R&D activities. It also includes software development, since this involves a technological or scientific advance.

Appropriability Methods: Methods of protection methods used by companies to ensure ownership of the results of innovation, such as formal methods (patent, trademark, copyright) and strategic methods (industrial secrets, design complexity, time advantage over competitors) employed by companies.

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