![]() ![]() Companies with more than 500 employees not only do 5.75 times more R&D than small companies, but their R&D is 13% more productive - meaning large firms are the real engine of economic growth. Recent research I conducted under a grant from the National Science Foundation, and documented in my book, How Innovation Really Works, reveals that large companies invest more in R&D and have higher RQ ( research quotient, a measure of the return on R&D investments). While it’s true that a small number of new firms are disproportionately innovative, big companies are the primary source of invention. The prevailing view is that small, entrepreneurial companies are the source of innovation and growth in our economy. What about the claim that companies can buy technology downstream through acquisitions? The first problem with this view is that it ignores where most innovation comes from. The likelihood of leaving decreases with pay (until salary reaches $5.2 million). Furthermore, if you treat these employees well, they are even more likely to stay. The likelihood of staying increases with both education and company tenure. Moreover, their work indicates that the employees you most want to keep are the ones most likely to stay. Even in that setting, where starting a firm is as simple as hanging a shingle, the researchers found that the probability of employees leaving to create new firms is 1%. Related research looked at employee movement to both startups and existing firms and obtained similar results. Although the setting was law firms, rather than technology firms, all the assets in those firms reside in human capital. This means in an industry of 100 firms, you can expect a new firm every 17 years. A recent study indicates that the average rate of new firm creation in an industry is 0.06%. For one thing, most industries just don’t have many new startups, period. If an employee comes up with a great new product or a technical discovery during R&D, aren’t they likely to leave the company, either to found a startup or to join a competitor? In fact, this is unlikely. If everyone followed that logic, however, there’d be little innovation to walk out the door or to acquire! Fortunately, neither of these concerns is warranted, and my research shows why companies, investors, and the nation will be better off if companies make long-term investments in R&D. This is both because the resulting knowledge might walk out the door, as employees join other firms or start their own, and because you can acquire firms who have the needed technology. According to Williamson, a current concern among many institutional investors as well as corporations is that companies don’t get credit for long-term investments in R&D. Sarah Williamson is the CEO of FCLTGlobal (formerly Focusing Capital on the Long Term), an organization cofounded in 2016 by BlackRock, CPPIB, Dow Chemical, McKinsey, and Tata Sons to encourage a longer-term focus in business and investment decision making. Even companies that claim to have a long-term orientation worry about whether R&D is worth the investment. ![]()
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