Are Small Companies More Creative than Large?

Karl Marx, hero of central planners. Photo by dalbera via Flickr.

According to conventional wisdom of economic planners such as the creators of Start-Up Chile and Startup America, small companies are more innovative than large. They theorize that large companies build excess bureaucracy and resist change, but big companies like Facebook and Google were once small and innovative often maintain their commitment to accepting risk as they grow into successful large firms. Economies benefit when big companies set standards that people rally around, and only big companies can tackle big challenges, and big companies not only drive incremental advances, but often attempt to create disruptive technologies.

According to an Economist magazine story about Why large firms are often more inventive than small ones:

American firms with 5,000 or more people spend more than twice as much per worker on research and development as those with 100-500. The likes of Google and Facebook reap colossal rewards from being market-makers rather than market-takers…. Politicians should certainly stop demonising big firms and sentimentalising small ones: an economy needs both. But they should not allow their new-found appreciation of big companies to degenerate into a taste for picking national champions.

The Economist discusses the 10 page report, Scale and Innovation in Today’s Economy, concluding that inefficient companies, large and small, should be allowed to die. Unfortunately, governments in the USA and Europe disagree, recently bailing out 500 European banks because they are supposedly too big to fail. Silver and gold have dropped sharply because investors are confident that the economic crisis is over. Their gullibility has created a good investment opportunity because politicians are “kicking the can down the road” as usual!

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