Does size matter?

Over the last few months there have been several interesting pieces about innovation, the size of companies, and other rather loosely connected topics.

Back in December, the Schumpeter column in the Economist reviewed an article arguing that large firms are often more innovative than small ones. This seems counter-intuitive – surely small companies are nimble and creative, and large ones are stultified by bureaucracy. But it turns out that there are good reasons why intuition may be wrong here, although Schumpeter thought that there are limits to the argument: large firms may be innovative, but it’s usually incremental innovation rather than disruptive innovation.

This all fits in quite well with an observation a friend and I made recently when discussing discrimination in employment. You might think that there will be less diversity in large, established companies than in small companies, especially high-tech startups. But in our experience the converse is true. We thought it was probably because large companies have better processes in place, are more conscious of the issues and are less likely to hire on the basis of existing friendships. Also, of course, they have larger workforces, so can reflect population diversity more easily than a small company in which every person constitutes say, 10% of the employees.

Conventional wisdom also has it that most job creation happens in small companies. Well, up to a point. Recent research has found that in fact once you control for the age of the firm there is no systematic relationship between firm size and employment growth, in the USA at least. Small firms tend to be younger — if they are older, then they are less successful (else they’d be bigger). (I can’t resist: repeat after me, correlation is not causation).

The Economist has a leader this week that discusses the contrast between large and small firms. It argues that, on the whole, economies relying more on small firms have been less successful than those with more large firms (think northern and southern Europe). Apparently productivity is much greater in large firms, at least partly because of economies of scale. Don’t have special regulatory and fiscal breaks for small firms, the leader argues, but go for growth instead.