Actually, small companies are better at innovation than large companies

Grant McCracken summarizes an Economist post that argues that big companies are better at innovation than small ones (well, he discusses both sides).

But theory says that small companies are actually the winners.

Economists have long wrestled with this, the “diseconomies,” problem: why do smaller organizations outperform large ones?  (Todd Zenger’s 1992 Management Sci piece summarizes this work nicely.)  Schumpeter indeed went both ways on this (Dick Langlois discusses the “two Schumpeters”-thesis a bit here).  But yes, large organizations seemingly have the resources, complementary assets, access to talent etc to outperform small organizations.  But small organizations still outperform large ones.

Large organizations have lots of problems (I’ll spare the references, for now).  They

• mis-specify incentives,
• suffer from problems of social loafing (free-rider problem),
• engage in unnecessary  intervention, etc.

And, if large organizations had such an advantage, why not take this argument to the extreme and simply organize everything under one large firm?  That, of course, was one of Coase’s central questions.  Obviously the organization-market boundary matters and there are costs associated with hierarchy.

Sure – there are lots of contingencies, caveats and exceptions [insert example from Apple or 3M].  And, definitions matter [what exactly is “small” versus “large”].  But on the whole, the theory says small companies win in the innovation game.

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