Small startups are the drivers of innovation. Inventors start companies, develop their ideas, secure financial backing, line up customers, and grow organically. Think about all of those stories of inventors in garages, cooking up the new ideas that change our lives.
Big companies are always worried that some small company is out there, plotting to bring them down with a disruptive new innovation. Established companies want to replicate the secret sauce of innovation in small companies. My own research has identified the best ways for companies to do this. The key is to foster the collaborative and improvisational dynamics that allow surprising new innovations to emerge, unplanned, from small and large social networks, as I explain in my book Group Genius. But it’s very, very hard for a big company to make this work. Internal innovations are great, but most big companies are just as happy to buy a smaller company that’s already come up a proven invention. It often costs less than doing your own internal innovation. But we as a society want those big companies to be investing in their own ideas, not just sitting back and profiting off of their old ideas.
The U.S. isn’t as innovative as it should be, given the amount our society is investing in innovation, according to a new study from The National Bureau of Economic Research (NBER).* The authors analyzed data on 760,000 U.S. inventors from 2000 to 2020. They wanted to explain a paradox: Since 2000, the share of the workforce engaged in research went up 70 percent. You’d expect innovation to shoot up in response, because it’s researchers who come up with the ideas that result in patentable innovations. But that’s not what has happened over the past two decades. The paradox is that innovation (measured as Total Factor Productivity or TFP) has slowed down since 2005.
Why has U.S. innovation slowed down even while our investment in innovation has increased so dramatically? This new study makes a strong case that it’s because of employment patterns. During the last 20 years–when innovation slowed down–the researchers identified another parallel trend: It’s become more likely that an inventor works for a big established company instead of a small startup. When an inventor gets hired away from a startup by a big company, their innovation drops. Using this huge database, the researchers were able to quantify the amount of the drop: between 6 and 11 percent. The authors conclude: More innovators are working for big companies and that’s making them less innovative.
Every company wants to hire proven innovators. You want that person to come on board and generate new ideas for you. But there’s a second more sneaky purpose: If you hire the innovator, then it’s less likely that person will work for someone else and develop new ideas that will compete with your own products. Either way, every company wants more innovators on their team.
It seems as if it should be just the opposite, because when you move to a big company, you have more resources: bigger budgets, more support staff, colleagues in marketing and packaging and distribution that know how to get new products to market. Your idea can move faster from your garage to manufacturing to customer. A big company should help you to release your full potential as an innovator. The company is even willing to pay you more money, in anticipation that your creative potential will increase. This same study finds that when you move to a big company, your pay goes up just over 12 percent.
The NBER paper is rich, complex, and sophisticated. It’s packed with data. I particularly enjoyed reading the citations to a lot of recent research on societal innovation. There are so many interesting findings in the paper that I could never fit them all into a blog post.
What should we do about this, if anything? If we believe that small companies are more innovative–and research suggests that they are–then we need to do something to keep the innovators from moving to big companies. As the authors say in their study, “Incumbent firms will poach inventors and shelve their innovations” (p. 21). But our economy needs those innovations, even though the incumbent firm is afraid the innovation will compete with them. It seems too harsh to accuse the big company of wanting to “shelve” the innovation; wouldn’t it be better for them to develop the innovation into a product?
We can also do things to encourage inventors to leave big companies and start small companies. But it seems like big-company inventors are staying where they are, more and more. Here are some possible explanations by the authors:
- Non-compete clauses might keep inventors from leaving big companies to start small companies. Suggestion: We should make non-compete clauses illegal, or at least, harder to enforce.
- If an inventor can’t get a loan to support growth, they’re less likely to go out on their own. Maybe we need to make sure those small companies can get the resources they need.
What about the inventor who is already at a small company and is thinking about a really nice salary offer from a bigger company? There has to be a larger incentive to staying small. But moving to a big company increases your income. The small company probably can’t afford to match that new salary offer, though. A lot of small companies retain the innovators by giving them stock or stock options. They aren’t worth anything right now, but if the company succeeds, that stock could be worth a lot more than your big-company salary would have been.
Another way to keep those inventors at small companies is to make it easier for them to defend their patents from bigger companies stealing or copying them. But that can cause problems, too, because there’s also research that societal innovation tends to decline when patent protections are too strong. I’m not what we should do, and these researchers are still figuring it out, too. I look forward to future research by these scholars.
*Where Have All the “Creative Talents” Gone? Employment Dynamics of US Inventors
Ufuk Akcigit and Nathan Goldschlag
NBER Working Paper No. 31085
March 2023
JEL No. O3,O4
Thanks to Christopher Mims of the Wall Street Journal for introducing me to this research: April 8-9, 2023, page B2, “More spending, less innovation.”
The Creativity Guru 
The issue here is that ‘group genius’ is often dependent on a particular group. For example, the particular group who created the TV ‘ Friends’ or even ‘Big Bang Theory’ had a collective comic genius dependent on the particular group individuals together. It has been unlikely for any of those brilliant individual comedians to achieve a similar magic with other group members. The same can be said for music groups who were fantastically successful. For example, what has Ringo Star done lately? What of Paul Desmond’s work after the Brubeck Quartet broke up? I think the argument is not so much large groups or small groups that suit inventors. It is more which particular individuals combining in particular groups of ‘magical thinking and doing’ that seem to be key.
I agree completely! There’s a long history of musicians like you describe-musicians who leave a successful group. I can think of a lot of reasons why someone might leave, but one of them is that they think they’ll be better, or more creative, out on their own. But I think you’re right that most of the time, their creativity doesn’t rise to that of the group.