Serial innovators in the markets for technology

21 Pages·2012·0.12 MB·English

Serial innovators in the markets for technology
Paper prepared for the ASEAT/Institute of Innovation Research Conference on:
Knowledge and Economic and Social Change: New Challenges to Innovation Studies
April 7-9, 2003, Manchester UK
Diana Hicks & Leigh Buchanan
CHI Research, Inc.
10 White Horse Pike
Haddon Heights, NJ 08035
Tel.: [phone] Fax: [phone]
E-mail: [email protected]
Inc. Magazine
77 N. Washington Street
Boston, MA 02114
E-mail: [email protected]
Abstract...............................................................................................................2
Introduction.........................................................................................................2
What is a serial innovator?..................................................................................3
Serial innovators and the markets for technology...............................................5
Points of difference...........................................................................................10
Firm age................................................................................................................10
High quality innovation........................................................................................11
Outside-linked innovation.....................................................................................13
Science-linked innovation.....................................................................................14
Patent strength as an alternative explanation........................................................15
Locally-linked innovation.....................................................................................17
Conclusions...........................................................................................................18
Acknowledgement............................................................................................19
References.........................................................................................................19
1
Abstract
Serial innovators are long-lived, small firms with a substantial, public record of
innovative success. This paper argues that such firms are often specialist suppliers of
technology. We draw on Arora, Fosfuri and Gambardella’s framework concerning markets for
technology to explain the patenting characteristics of these firms. We find that the firms produce
technology that in comparison to large firm technology is higher quality, more broadly based,
and more closely linked to scientific research. It may also be concentrated in newer generations
of technology. The firms are younger than large firms as well. We hypothesize that serial
innovators, survivors among the specialist technology suppliers, may have mastered innovating
in technology with these characteristics because such technology is likely to be general purpose
and so more broadly tradable. They thus become serious players in these markets – at least for a
few years until a new generation of technology emerges.
Introduction
Small firms have long engaged the interest of students of innovation. The innovative
efforts of small firms embody a tension between serious barriers and distinct advantages relative
to large firms.1 Establishing empirically the balance between these forces involved investigating
whether small firms innovated more or less efficiently than large firms.2 From the policy
viewpoint, new technology-based firms have been studied for their promise of growth and
attendant multitudes of new jobs. Such studies have assumed that small firms were mini-large
firms: Were mini-large firms more or less efficient innovators than large firms? Which mini-
large firms would grow large? As innovation is reshaped, a fresh perspective on small firms has
emerged.
There is a type of innovative firm that has survived beyond the entrepreneurial moment
yet remained small; a firm so unlike the giant multi-national that its relative innovative efficiency
seems irrelevant. Such firms, hitherto uninteresting, may prove to be key players in markets for
technology. Arora, Fosfuri and Gambardella analyze markets for intermediate technological
inputs in which the purpose of a transaction is the creation of new technologies. They include
within their remit contract research, technology licensing, R&D joint ventures of various kinds,
sale or licensing of research tools and other types of technical services (Arora, Fosfuri and
Gambardella, 2001,6). When such markets reflect a division of innovative labor involving
specialist suppliers of technology, we are likely to find small firms.
Understanding the contribution long-lived small firms make to technical change seems
central to understanding their economic contribution. This paper argues that these firms, who we
name “serial innovators”, are often successful, specialized suppliers in markets for technology.
As such they permit an innovative division of labor to exist, and they are encouraged into
existence by the expansion of technology markets. Arora, Fosfuri and Gambardella argue that

1 See: Cohen & Klepper, 1991; Feldman, 1997; Freeman & Soete, 1997; Koen, 1992; Obermeyer, 1981;
Romeo 1984; Rothwell & Zegveld, 1982; Rubenstein & Ettlie 1984.
2 See: Edwards and Gordon (1984), Gellman Research Associates (1982) and Pavitt et al. (1987)
2
the increasing division of labor in innovation must be understood in order to understand the
sources of economic growth in the twenty-first century. This paper juxtaposes their thesis with a
comparison of the innovative efforts of small serial innovators and large firms. In explaining the
points of difference between the two, we come to a greater understanding of markets for
technology.
What is a serial innovator?
We label as “serial innovators” small firms with a sustained, public record of successful
technical advance. Using the American definition, “small” firms are those with 500 or fewer
employees. Naturally, we draw upon patent information to establish the public record of a firm’s
successful technical advance. We examine here the set of U.S. firms with 15 or more USPTO
patents issued between 1996 and 2000. To be included an organization had to be independent,
for-profit, not bankrupt, not a joint venture and not foreign owned during the first half of 2002
when the data were collected. All establishments and subsidiaries were unified to the ultimate
parent company; their patents counted towards the parent firm patent count. The population of
US firms with more than 15 patents issued 1996-2000 encompasses 1,071 firms. One-third of
these or 356 are small firms and 27 are of unknown size.3 The firms own 193,976 patents (here
as in what follows “patents” refers to type 1, i.e. utility, patents that list a U.S. inventor address
and were issued by the USPTO between 1996 and 2000). Small firms account for 6% of these
patents.4
For a small firm, owning 15 patents is quite an achievement. Therefore, we are not
looking at start-up firms, the crowd of promising beginnings that grab most media attention. Our
small firms are survivors and have attained a track record of credible technical achievement over
at least 5 years. A good description of such firms was devised by Leigh Buchanan, a journalist
with Inc. magazine, who labeled them “serial innovators”.5 She contrasts serial innovators with
serial entrepreneurs. Small firms normally start with a great idea. The firm is founded to exploit
the idea, to get it out into the marketplace. If it fails the firm disappears; if it works the
entrepreneur may sell out. Even if the idea works and the firm is not sold, the next idea, or a
process to generate more ideas becomes a problem, and often the small firm disappears after the
first idea is worked through. Whatever the outcome, in the U.S. the entrepreneur is likely to go
on to start another firm, and there are a lot of “serial entrepreneurs.” The serial innovators are
distinguished by sustaining innovation around the first idea or by having moved beyond the first
idea while maintaining their innovative edge.

3 The patenting characteristics of the firms of unknown size suggest they are small, and we include them
amongst the small firms.
4 Small firms account for much larger than 6% share of U.S. invented, U.S. company owned patents. This
is because small firms account for a large share of patents produced by organizations with less than 15 patents 1996-
2000. We estimate that overall small firms account for about 43% of U.S. company-owned patents. This is quite
close to their share of employment. See Hicks 2002.
5 The August 2002 issue of Inc. magazine contains profiles of some of these firms.
3
Although these firms are not mini-large firms, there are ways in which the serial
innovators are more similar to large patenting firms than to the general population of small firms.
For example, serial innovators are concentrated in industries in which technical innovation and
patent protection are important. The large firms among the largest 1,000 patentees differ from
other large firms in precisely the same way. The firms are largely manufacturing companies and
almost one-quarter are found in semiconductors, pharmaceuticals, biotechnology and medical
devices/equipment – industries that account for about 2% of U.S. manufacturing firms.
Beyond industry differences, serial innovators differ from other small firms because they
have invested substantial time and money in innovation. The firms are serious about innovation
and so are heavyweight contributors to technical change. Their innovative efforts can look like
best practice in large firms. Unusual for small firms, the firms are also very likely to have an
R&D group and to have given some thought to how it was set up and managed. There tends to
be formal structures, committees etc., for approving funds for potentially patentable ideas and
then moving those projects toward the patent stage. Compensation is often tied to patents in the
form of bonuses. Buchanan found that the firms tend to set a goal that a certain percentage of
their earnings should come from new products. 3M is famous for doing this, but many of these
small firms do the same. The percentage varies; it might be 8%, 15% or 30%. But all the firms
emphasize new product development. In addition, the marketing people in these firms are in
constant communication with the rest of the firm relaying customer preferences. Everyone is
attuned to quickly building solutions customers are reported to want.
If asked to guess, most experts would probably say that patenting was a point of
difference between small and large firms. Small firms find the costs of obtaining and
maintaining patents prohibitive, and they also find daunting the prospect of expensive litigation
to defend their intellectual property rights. Belief that small firms do not patent seems to be
supported by empirical research. Cordes, Hertzfeld and Vonortas surveyed high tech small firms
and found that patenting was not the most important means of protecting product or process
innovations. Informal means of IPR protection were of primary importance to their respondents
(Cordes et al., 1999). Obermayer also reported that small firms relied more on proprietary know-
how and trade secrets than on patents (Obermayer, 1981). The thing is, Cohen, Nelson and
Walsh found substantially the same result in their survey of manufacturing firms, which over
sampled Fortune 500 firms (Cohen et al. 2000). In Cohen et al.'s survey, median firm size was
3,309 employees and median annual sales were $555 million.
Table 1 compares the two studies by comparing the rankings of intellectual property
protection methods for product innovations. For Cordes et al. the ranking is based on share of
respondents reporting that the method was "very important". For Cohen et al. the ranking is
based on the mean percentage of product innovations for which the mechanism was considered
effective across all technologies. The rankings are identical, which demonstrates that large and
small firms hold the same beliefs about the importance of intellectual property protection
methods. Complementary manufacturing, sales and service are absent from the small firm study.
If these factors were weaker in small firms, as seems likely, strong patent protection would only
be more important for small firms.
4
Table 1 - Importance of Intellectual Property Protection Methods in Product Innovation
Cordes Cohen
Mechanism Small firms Large firms
Lead Time 1 1
Secrecy 2 2
Complementary Mfg. - 3
Complementary Sales/Svc - 4
Patents 3 5
Other legal 4 6
Small firms do face special circumstances with regard to patents. For example, small
firms are less able than large firms to afford the expense of applying for and maintaining patents
and are known to be less likely to obtain foreign patent protection (Mogee et al., 1996). Small
firms also are less able to pursue costly legal campaigns to enforce their patent rights. Also, in
semiconductor related areas, in which firms' technologies overlap and change quickly, patents
are often used en masse in negotiations to forestall accusations of infringement, keeping
production running when injunctions are threatened. Specialized small firms cannot amass a
large enough pile of patents to play this game effectively (Cordes et al., 1999).
Because they devote so much effort to innovation, serial innovators are motivated to
overcome the hurdles to obtaining, maintaining and litigating patents. They feel they must
protect their investment. Again, these patenting small firms are more like large patenting firms
than other small firms in this regard.
Serial innovators and the markets for technology
Despite the similarities between the R&D efforts of innovative small and large firms – we
maintain that the small firms and their technology are different. This is because serial innovators
are often specialist suppliers of technology. Buchanan’s interviews highlighted the specialist
technology supplier character of the firms. She found that a subset of these firms, especially in
the pharmaceutical and biotechnology areas, maintain their R&D with support from large firms
and are essentially outsourced R&D operations for large firms. She also concluded that unlike
most small firms, these firms tended to have a core technology rather than a core product. They
seemed to be interested in not just a new thing, but also a new and different way of doing
something, a new process. In other words at their heart the firms were technology suppliers
rather than product manufacturers.
That the small firms tend to be specialist suppliers of technology is also suggested by
their concentration in technologies where markets are well developed. Arora, Fosfuri and
Gambardella describe the substantial evidence for technology markets in chemical plant design,
software, biotechnology, drug discovery and semiconductors. We find that the serial innovators
are over represented among firms patenting in those technologies.
5
Table 2 examines the distribution of small firm patenting across 30 technologies.6 The
table reports two measures. The first is the small firm share of patents in each technology area,
and the total number of patents. The second measure, the share of firms that are small by
technology area, is more complicated because to obtain it we first had to classify each firm into a
technology area based on where most of its patents are found. There were a few firms for which
two technology areas were tied, and we counted them into both technology areas. Therefore the
sum of the number of firms across technology areas exceeds the number of firms in the study.
Overall, small firms have a 6% share of patenting and one-third of the firms are small. In
biotechnology however, small firms produce one-quarter of the patents in this study and account
for 71% of the patenting firms. Pharmaceuticals, chemicals and agriculture are closely related;
some genetic engineering falls under agriculture and small firms with a high proportion of
chemistry patents tend to be engaged in drug delivery, DNA chips, combinatorial chemistry and
the like. In semiconductors there is a high percentage of small firms, though their share of
patenting is not high. This suggests that although small firms are relatively active, large firms
have a higher propensity to patent than in other areas and so overshadow small firm patent
counts.7 The concentration of small firm patenting in these areas supports the notion that the
serial innovators tend to be suppliers of technology because these are areas in which markets for
technology are well developed.
We do not see evidence of a concentration of small firm patenting in software. Software
patenting is found in the computers category. It may be that the category is not specific enough
or it may be that software patenting is relatively undeveloped and large firms are more likely to
patent.
Among the strongest areas of small firm patenting are medical electronics and medical
equipment. Although Arora, Fosfuri and Gambardella did not address this technology, Red
Herring reports that venture capital interest in this area is strong, and there is a market for firm
acquisition with Johnson & Johnson, Boston Scientific and Medtronic buying firms to acquire
their technology. The market is attractive because development costs are considerably lower
than for pharmaceuticals and FDA approval is easier (Stein, 2003). The same factors no doubt
make it more possible for the small firms to become manufacturers and the technology has
similarities to instrumentation which has been a long-standing strength of small firm innovation
(Rapoport, 1990; Shimshoni, 1970). Further investigation is needed to ascertain whether a
market for medical device technology is developing, and to identify the factors driving
developments.
“Unclassified” technologies are also a small firm strength. Here the story is different.
Unclassified patents encompass, amongst other things, patents on gaming – golf, snowboarding,

6 Using CHI’s classification of patents into 30 broad technology areas. This classification is based on the
first listed IPC or international patent classification code on each patent. The classification was designed to roughly
align with the SIC or NAICS classifications.
7 That large IT firms have recently dramatically increased their propensity to patent is reported in Hicks et
al., 2001.
6
toys, casino gaming etc. 21% of the patents with the words: toy, game, gaming, snowboard or
golf in their titles belong to small firms. And 11 of 13 firms with more than half of their patents
in this category are concerned with gaming or leisure. Mattel, Hasbro, Huffy (bicycles) and
Callaway Golf are examples. This is not a traded technology, but it may be one with outstanding
attractions for serial innovators. First, like medical devices and instrumentation, the
complementary assets needed to realize the value of an innovation may be affordable for small
firms who can thus succeed in manufacturing and marketing. Second, small firm establishment
often is driven by someone’s passion. If a technologist’s passion is golf, or snowboarding or
toys, establishing an innovative equipment firm is a natural expression of that. In sports, there
would be substantial rewards to the serial innovator, who would enjoy a lifestyle in close contact
with users of their equipment – i.e. others like themselves passionate about the game or sport -
from whom they can glean innovation ideas. Perhaps they attain a central position in the
sporting community through their supply of high-end equipment to the elite. Perhaps therefore,
the rewards for one’s lifestyle of running such a business exceed those to be gained by selling
out. This is probably also true because absent opportunities for technology trading, big investor
money does not swirl around snowboarding and golf in quite the same fashion as it does around
semiconductors and biopharmaceuticals. Therefore in this area entrepreneurs may be more
likely to become serial innovators.
7
Table 2 – Small firm share of patenting by technology
% of
patents % of
from firms
small # of that are
Technology Area firms patents small # of firms
Biotechnology 25% 3,886 71% 45
Pharmaceuticals 19% 6,453 68% 59
Medical Equipment 11% 8,437 45% 88
Unclassified 11% 2,511 31% 26
Medical Electronics 11% 2,974 64% 14
Chemicals 9% 15,760 29% 91
Agriculture 8% 2,561 28% 18
Glass, Clay And Cement 7% 1,003 50% 2
Wood And Paper 7% 1,961 29% 21
Food And Tobacco 6% 1,453 19% 16
Textiles And Apparel 6% 1,837 19% 16
Power Generation And Distribution 6% 2,045 80% 5
Fabricated Metals 5% 2,313 36% 11
Industrial Process Equipment 5% 5,180 28% 39
Primary Metals 5% 586 22% 9
Electrical Appliances And Comp 5% 10,436 28% 64
Other Transport 5% 1,136 10% 10
Miscellaneous Manufacturing 5% 9,313 16% 73
Heating And Ventilation 5% 1,026 43% 7
Telecommunications 5% 19,099 33% 91
Semiconductors And Electronics 5% 13,893 44% 43
Miscellaneous Machinery 4% 6,181 17% 54
Office Equipment And Cameras 4% 9,268 43% 37
Measuring And Control Equipment 4% 8,201 26% 39
Plastics, Polymers And Rubber 4% 7,187 21% 28
Industrial Machinery And Tools 3% 8,050 20% 54
Motor Vehicles And Parts 3% 5,774 22% 37
Computers And Peripherals 3% 31,645 30% 101
Aerospace And Parts 2% 1,147 0% 1
Oil And Gas 1% 2,660 6% 17
All technology areas 6% 193,976 33% 1116
Firms that patent heavily are largely manufacturing firms. Therefore, one marker of a
specialist technology supplier among firms that patent heavily may be the absence of
manufacturing. We examined company descriptions for a sample of 140 firms with less than 45
8
patents 1996-2000, 53 large firms and 85 small firms.8 91% of the large firms were
manufacturers, that is produced a product, while 66% (56) of the small firms were
manufacturers. Although the presence of manufacturing is a useful indication that a firm’s
primary business in not trade in technology, at least three of the small manufacturers (and one
large) also consult or provide technology services. The remainder of the firms did not seem to
produce material goods at all. 21% of the small firms (or 18 firms) were research and/or
development firms. Six firms, 3 large and 3 small, sold services – beyond development or
research services. Eight firms, 2 large and 6 small were software firms. One small firm was a
fabless semiconductor manufacturer and another called itself a technology supplier. This
supports the idea that the small firms tend to be specialist suppliers of technology. Large
patenting firms are likely to be manufacturers, while small patenting firms much less so. For a
substantial fraction of the small firms, their only business is technology trade through R&D,
technology services or semiconductor chip design.
We have one direct piece of evidence concerning small firm participation in markets for
technology. It comes from data on co-assigned patents, that is patents jointly owned by two or
more organizations. 3.2% of small firm patents are co-assigned, compared to 1.7% of large firm
patents. That is, small firm patents are co-assigned 1.8 times as much as large firm patents. Co-
assigned patents are relatively rare, because organizations do not like to share ownership of their
technology. 1.4% of US invented patents were jointly owned by organizations in 1998/99 (Hicks
& Narin, 2001).9 Co-assigned patents are concentrated in biotechnology, pharmaceuticals and
medical equipment, where they often involve public sector organizations jointly patenting with
companies. In biotechnology, the small firm rate of joint patenting in biotechnology – 6% -
equals that of large firms. It is the other technologies, in which joint patenting is less common,
in which we find overall that the small firm rate of co-assigned patenting exceeds the large firm
rate. Excluding biotechnology patents, 3.0% of small firm and 1.7% of large firm patents are co-
assigned. Hagedoorn argues that co-assigned patents result from jointly conducted R&D on a
small scale that perhaps only produced one or two patents making it difficult to split the
intellectual property (Hagedoorn, 2002). That small firms are relatively more involved in these
types of transactions supports the interpretation that an important part of their business is in
markets for technology.
That serial innovators are often specialist suppliers of technology further explains their
emphasis on intellectual property. Arora, Fosfuri and Gambardella argue that intellectual
property rights encourage the rise of a market for technology, and that patents are likely to have
greater value for small, specialist technology suppliers than for manufacturing firms. “Whereas
the later have several means to protect their innovations, including their manufacturing and
commercialization assets, the former can only appropriate the rents to their innovation by
leveraging the protection that patents provide.”10 A firm whose sole purpose is to capture the

8 The sample comprised firms whose names began with A-Biop and M-Prog. Firms for which we could not
obtain a description were excluded.
9 Calculated excluding unassigned patents and parent-subsidiary joint patenting for the largest patenting
companies.
10 Arora, Fosfuri and Gambardella pp. 261-2.
9
value in a technology by licensing or selling itself to a large firm needs to protect its intellectual
property in patents. The same reasoning applies when the small specialist technology supplier
raises financing. Small R&D intensive companies are almost always searching for new funding.
Patents, among the most concrete proofs of intellectual assets can be important in persuading
investors of the firm’s worthiness. The firm’s assets are largely intangible and patents - along
with trademarks or scientific papers - confirm for investors the substance of the technology
developed by the firm.
Points of difference
Many of the serial innovators appear to specialize in developing technology, which is a
viable business model when technology is tradable. The serial innovators differ from most small
firms in emphasizing technology. Because they are serious about innovation, they share
characteristics with large innovative firms. They are similar to large innovative firms in often
having formal targets, R&D departments and an emphasis on patenting to protect their
intellectual property. However, firms that specialize in supplying technology are not mini-large
firms.
Large firms do sell technology. Therefore the difference is not one of participation;
rather it is a difference in commitment. For a large firm, technology licensing augments their
R&D strategy. It likely serves as an adjunct rather than the purpose around which the firm’s
innovation is structured. The small technology supplier’s existence depends on the technology
market. Therefore, their innovative efforts can be expected to be oriented to the requirements of
that market. By comparing characteristics of small and large firm innovation we can uncover
some of these requirements. We interpret the differences as contrasts between general purpose
manufacturing firms and specialist suppliers of technology.
Firm age
The first difference between large and
70%
Figure 1 - Small firms are younger
small patenting firms is age. That the small
firms are long-lived does not mean that their
60%
age distribution mimics that of large firms. large
The large firms are middle aged or older 50%
compared to the crowd of teenage small firms. ms
We do not have the founding date for each fir 40%
f
firm, but we do have the first year in which re o 30% small
each firm applied for a patent (for patents a
h
issued 1970 or later). So we can examine firm S
20%
age as judged by the year in which the firm, or
its predecessors or subsidiaries, made its first 10%
patent application. We classified firms
according to the decade in which they applied 0%
for their first patent. Figure 1 displays the before 1970' s 1980' s 1990' s
results. 43% of the small firms applied for
Date of first patent application
their first patent after 1989, compared with
5% of the large firms. On the other hand,
10