New Study Reveals Large Firms' Role in Innovation

Megafirms create new technologies too!

While President Joe Biden's Federal Trade Commission (FTC) keeps trying to stop successful companies from growing through mergers and acquisitions, a new study highlights the significant role large firms play in developing new technologies, goods, and services.

In a July working paper for the National Bureau of Economic Research, titled "Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent Data," five researchers use sales data and patent data to evaluate the role of megafirms—"the top 50 firms by sales in any given year"—in developing "novel patents."

Critics often allege that firms have used their market power to accumulate patents strategically to crowd out competitors. This leads "to slower diffusion of knowledge and deceleration in business dynamism," argue the economists Ufuk Akcigit of the University of Chicago and Sina Ates of the Federal Reserve Board in a forthcoming study titled "What Happened to U.S. Business Dynamism."

But the working paper finds that it isn't just the total share of patents held by megafirms that's been growing in recent years. So has their share of novel patents, defined as "those that introduce new combinations of technological components that had never been utilized together before" (as opposed to patents that are "filed for purely strategic reasons and never used in applications"). They conclude from this that big firms have been playing "an increasingly important role in generating new technological trajectories in recent years." 

"Mega firms, especially new mega firms…were small startups just some 20 years ago, and they became what they are today by winning in a competitive environment," says the study's lead author, Serguey Braguinsky of the University of Maryland.

According to the paper, the share of novel patents held by megafirms underwent a long decline from the 1980s to the mid-2000s. But then they began combining information and communication technologies (ICT) with non-ICT components. For example, in 2006 Nike combined "arrangements for transmitting signals characterized by the use of a wireless electrical link" with "footwear characterized by the shape and use." This led to the creation of the NIKE+iPod Sports Kit.

The authors add that the innovation generated by megafirms is not monopolized by those businesses. Novel patents can catalyze follow-on patents at other firms that use "the same new technological combination," diffusing the knowledge through society. 

As the authors explain, "mega firms have more follow-on patents that are assigned to entities other than themselves."

All this suggests that regulations aimed at reining in megafirms could diminish their ability to innovate. The FTC is currently trying to make mergers more difficult through guidelines that lower the threshold for considering a market "highly concentrated" and that conflate mergers between companies that sell similar products with mergers between companies that don't.

These findings also counter prevailing narratives that big business can't innovate. "Given that the paper finds that very large firms, particularly IT firms, generate very important innovations at a higher rate than other firms, including small firms, this suggests that the current in vogue neo-Brandeisian view that 'big is bad' is bad: bad for innovation and by extension, U.S. global competitiveness," says Robert Atkinson, president of the Information Technology and Innovation Foundation.

"I think this strongly suggests that free markets have a self-correcting mechanism built into it and should be able to keep the U.S. innovation engine running," says Braguinsky. "Provided," he adds, that "they are free from various distortions."