The Importance of Research and Development for Innovation in Small and Large Canadian Manufacturing Firms

Abstract

The debate over the appropriate function of government policy for R&D subsidies brings into focus the different roles that are played by large and small firms in the innovation process. Small firms, it is often claimed, have different tendencies to use R&D facilities than large firms and, therefore, require the development of special programs that are directed at this sector. This paper examines the differences in the innovation profiles of small and large firms, and how R&D intensity and efficacy varies across different size classes. It investigates the contribution that R&D makes to success in the small and medium-sized population and the types of policies that small firms feel are the most appropriate to reduce the impediments to innovation that they face.

The paper finds a number of differences between large and small firms in the tendency to innovate and to use R&D facilities. Small firms can be divided into two groups. The first group consists of firms that resemble large firms in that they perform R&D and generate new products and processes primarily through their own efforts. The second are those who rely upon customers and suppliers for their sources of ideas for innovation. Large firms, by way of contrast, tend to rely more heavily on R&D. While they too rely on networks for ideas, their networks focus more heavily on relationships with other firms that belong to the same firm.

Most of the differences between small and large firms are explained by the fact that firms of different sizes specialize in different parts of the production process. Firms of different sizes serve different niches; they each have their own advantages. Small firms are more flexible but can suffer from cost disadvantages due to scale. They overcome their disadvantages by networking with their customers and by showing the same flexibility in their R&D process that they exhibit elsewhere. They rely less on dedicated R&D facilities and more on the flexible exploitation of R&D as opportunities arise. They also network with customers in order to adopt their suggestions for new innovations.

JEL Classification: L52, L60