A new study by the National Bureau of Economic Research (NBER) titled “Mega Firms and Recent Trends in US Innovation: Empirical Evidence from US Patent Data” found that large firms have played an increasingly important role in creating new technology. Last two decades.
To measure innovation, the study relied on patent data from the United States Patent and Trademark Office. Since many patents may be filed for purely strategic reasons and never enforced, the authors defined new patents as patents that introduce new combinations of technologies. An example of this is the 1994 Citibank patent for “Trusted Agent for Open Electronic Commerce”, which combined commerce and encryption technology to anonymize e-commerce transactions. As the study stated, this innovation solved “the joint problem of protecting the privacy of buyers and sellers” while allowing e-commerce to continue.
To measure the effect of business size on innovation, the authors isolated mega firms (the top 50 firms based on sales in any given year among all public firms in the computed database) from other firms in the database.
Mega firms produce a large and growing share of innovative patents. These companies’ share of new patent filings declined from about 16 percent in the early 1980s to about 8 percent in 2000, before fully rebounding by 2016. In other words, mega companies played a larger role in developing new technology. in the mid-2010s than at any time since the early 1980s.
Mega firms’ increasing share of new patents is also associated with greater innovation overall. Consistent with the study by Aarts et al. (2021) and Kalyani (2022), the study found that:
The share of innovative patents in total patent applications fell from 12 percent in 1980 (8 percent in the early 1990s) to 3 percent in 2007. […] However, after 2007, the number of new patent applications doubled to about 8,000 per year, and their share of total patent applications increased to 6 percent by 2016, a level last seen in the mid-1990s.
By this account, big companies are helping the United States’ innovation ecosystem thrive—not stifling it.
Patents from larger companies were more likely to facilitate further innovation than patents from other entities. While mega firms had about 7 percent fewer follow-on patents (subsequent patents that reuse the new technology of the novel patent, including other firms) than other entities in 1991–2000, the study reports that “They had 6 percent more in 2007-2016.” Mega firms were 1.7 percent less likely to have no follow-on patent than other entities in 2007–2016. In other words, inventions made by mega firms were more likely to be innovative than inventions made by other entities. The possibility was high.
There is also evidence that these follow-on patents benefited firms other than the focal firm (the firm that created the new patent). Compared to other businesses, mega firms had smaller shares of follow-on patents assigned to the focal firm. In other words, mega firms spread knowledge beyond their borders, not only to consumers but also to other firms.
Mega firms’ patents were also more likely to be a “hit” (i.e., in the top one percent of the distribution of follow-on patents within the first five years). If a patent generates many follow-ons, the original invention was probably groundbreaking and had high potential to transform its industry. From 1991–2000 to 2007–2016, the share of mega firms in “hits” nearly doubled from 11.9 to 21.2 percent. This is evidence that, in recent years, mega firms have created the fifth most influential inventions.
Other recent research confirms the importance of large companies in innovation. This year, economists showed that the share of patents held by the top one percent of companies in the patent stock has been increasing over the past several decades. These studies provide evidence that mega-firms are essential to sustaining American innovation.
why does it matter
Anti-corporate neo-Brandeisians are trying to advance their goal of changing American distrust by, in part, pushing the narrative that big companies are antithetical to innovation and, therefore, big companies need to be broken up. Is. As the NBER study shows, this is unsupported, if not often outright false.
An aggressive, neo-Brandeisian approach to antitrust could do lasting damage to the US economy. For example, in Experimental Capitalism: The Nanoeconomics of American High-Tech IndustriesEconomist Steven Klepper argues that antitrust actions against RCA, the leading American color TV manufacturer, around the 1950s were one of the triggers that led to the complete demise of the American color TV receiver industry. Facing several Justice Department lawsuits, RCA agreed to make all of its color TV patents available to its domestic competitors for free. This proved to be the beginning of the end for RCA and the rest of the American industry. In fact, similar mistakes were made with AT&T and Bell Labs, Xerox and others. With US technological dominance facing increasing global challenges, the stakes could not be higher: Antitrust enforcers would do well to heed the famous adage that those who do not learn from history are destined to repeat it. Are cursed.
If it’s true that big companies are getting in the way of innovation, strict antitrust might make sense. But if these big companies play a major role in creating new technology, this plan could backfire. For example, in milestone Capitalism, Socialism and Democracy, Joseph Schumpeter discusses how scale can encourage and facilitate innovation, such as allowing companies to optimize their investments in R&D. In this case, increased distrust will discourage the risk-taking and R&D that drives innovation. And, as we have discussed, the evidence continues to support the Schumpeterian view: large companies play a key role in shaping America’s innovation economy. An antitrust paradigm that ignores this will have the perverse effect of exporting American innovation to other countries with less regulatory interference.