Over the last thirty years, economists have dramatically improved our theoretical understanding of how product innovations influence major aspects of the economy. While the role of new products in generating economic growth has been the focus of a large body of theoretical literature in economics, there is little empirical evidence on whether product innovations indeed contribute to growth significantly, and if so, through what channel such contribution takes place. The project provides new and comprehensive evidence on the nature and extent of product introductions by firms. This is achieved by combining data on firms' product portfolios from the Thomas Register of American Manufacturers with U.S. Census Bureau's confidential firm-level microdata. Three main issues are considered. First, the connection between firm characteristics and product introductions is explored to uncover whether new products predominantly originate from new versus established firms. Second, the link between new products and entrepreneurial activity is studied to understand whether and to what extent product innovations spur new entrepreneurial activity. Finally, the contribution of product innovations to economic growth is assessed.
Broader Impacts
The broader contribution of the project is on two major fronts. First, the project creates a novel longitudinal database that associates narrowly defined products with firms over time. The database enables more detailed research on product innovations and constitutes an invaluable resource to researchers in other branches of economics and related fields who aim to understand the composition of firms' product portfolios. Second, the project has important policy implications pertaining to the establishment of R&D-intensive ventures in general, and small firms and start-ups in particular. Innovations are considered an engine of growth, so the potential gain in welfare that arises from subsidizing small or young research-intensive firms can be significant. If small, young firms are responsible for more product innovations than old, large firms, then government policy should aim towards subsidizing innovation efforts in small, young firms so as to maximize the government's return on investment and the favorable impact of entrepreneurship on society. In light of the fact that the U.S. economy has recently undergone the most severe recession since the Great Depression, it is especially salient today to understand further the nature of innovation and its role in the economy, both as a means by which to mitigate the effects of the recession and as an engine of long-run growth.
This paper examines the extent to which product innovations stem from small, young firms versus large, established firms by analyzing the patenting behavior of public firms derived from the NBER-Compustat database and assembling a dataset of private and public firms from the Thomas Register of American Manufacturers. The Thomas Register evidence shows that small firms are surprisingly capable at inventing and managing products relative to large firms. Suppose a small firm is defined as one with fewer than 500 employees. In 2002, small firms had an average of 10.01 products, while large firms had an average of 21.44 products; thus, small firms had on average half the number of products per firm compared to large firms. However, a firm with median employment of 1,000 had 0.0214 products per employee, a firm with median employment of 375 had 0.0534 products per employee, and a firm with median employment of 15 had 0.8767 products per employee. Similar findings are obtained for 2007. The NBER-Compustat evidence shows that small firms are more innovative per dollar of R&D than large firms, and the extent to which this occurs is decreasing in firm age; and young firms are more innovative per dollar of R&D than old firms, and the extent to which this occurs is decreasing in firm size. Define a young firm as below the median age and a small firm as below the median employment. Young small firms obtained on average 2.42 times more citations per dollar of R&D stock than young large firms; by contrast, old small firms are 2.05 times more productive at R&D than old large firms. Young small firms obtained on average 2.50 times more citations per dollar of R&D stock than old small firms; by contrast, young large firms are 2.12 times more productive at R&D than old large firms.
