The fruit flies of innovations: A taxonomy of innovative small firms

Abstract

Taxonomies of patterns of innovation give a dominant role to large firms, and are often based on empirical studies that exclude micro firms. This paper proposes an empirical taxonomy of the innovative firms at the bottom of the size distribution, based on a new survey of 1234 small firms and micro firms in The Netherlands, in both manufacturing and services. These firms differ not only in their innovative activities, but also in their business practices and strategies, such as management attitude, planning and external orientation, that they use to achieve innovation. The taxonomy identifies four categories of small innovative firms: science-based, specialised suppliers, supplier-dominated and resource-intensive. It suggests a more diverse pattern of innovation of small firms than in Pavitt's [Pavitt, K., 1984. Sectoral patterns of technical change: towards a taxonomy and a theory. Research Policy 13 (6), 343–373] taxonomy, a pattern that is shared by both manufacturing and service firms. Finally, the research shows that taxonomies can be effectively used to map differences in the rates, sources and nature of innovation, with the differences in the business strategies of innovative firms.

Introduction

Fruit flies are a favourite object of study in evolutionary biology because things happen fast in their world. Their evolution can be observed over short time periods (Maynard Smith, 1996).¹ By analogy, small firms operating at the margins of the business population may also be useful, in this case for the study of innovation. There is lots of “room” for innovation at the bottom of the size distribution, because new small firms are continually entering the market with new ideas for new products and processes (Audretsch, 1995). To be sure, often these new small firms are short-lived, exiting the market within few years of their entry. There is a high turnover of such firms (Caves, 1998). However, the small firms that do innovate successfully increase their chances of survival (Cefis and Marsili, 2003) and growth (de Jong et al., 2004). The new small firms that survive contribute to a large proportion of growth at the economy-wide level, in fact (Foster et al., 1998).

The behaviour of small firms can vary substantially. Some small firms survive by competing in a market niche, while others pursue more radical innovations and, eventually, themselves become market leaders. This diversity among new small firms cannot easily be reduced to a general model. Their variability demands a taxonomy, a classification system that can be used to identify the many variables that might be in play. Taxonomies are a regular part of evolutionary biology, and have contributed much to the study of fruit flies. The taxonomic approach is similarly beneficial to the study of small firms.

There has been little study done of the innovative behaviour of small and micro firms using taxonomies. The lack of an obvious taxonomy to apply in identifying the variables to be studied may be part of the problem. As well, it could be argued that there was so much variation among small firms that no clusters of common characteristics could be identified, although the validity of this assertion can easily be demonstrated by carrying out research.

The most commonly used taxonomy for identifying variables affecting innovation is Pavitt's, but Pavitt focused his study on sectors, although he examined firms. He found many commonalities amongst firms in the same sector, so much so that he spoke about industries: the chemical industry, for example. Pavitt's taxonomy focuses on large firms. Other studies that consider variables related to innovation in small firms do not pay much attention to sectors or industries.

This paper takes up the challenge of studying innovation patterns in small and micro firms. It develops a classification system for such firms, based on a study of small and micro firms in The Netherlands. The results of our research provide a useful snapshot of the innovative behaviour of small firms, but they also demonstrate that the classification system that we developed to analyse variables in the innovative behaviour of these firms is very similar to that developed by Pavitt, despite the different orientations of the research.

The paper begins with a theoretical discussion of several taxonomic schemes for studying innovation, which are summarized in a table at its conclusion. It then provides a discussion of other methodological issues that arose in developing a classification system for our study. Once these tasks have been done, the paper reports on the study. It concludes by discussing the relevance of Pavitt's taxonomy to the kind of study that we carried out, and it comments on the significance of the differences we found between his study and our own.