Discussion of Firm Size and Innovation; Evidence from European Panel Data Belenzon and Patacconi ASSA/AEA Annual Meeting 2008 New Orleans, Mark Sanders Utrecht School of Economics Max Planck Institute of Economics

Summary Data: Authors collect EU firms that published and/or patented in : -Patents (citation weighted) -Publications (citations weighted) -Financials -About firms observations. Results: For this sample the authors find: -Small firms (below median employment) tend to benefit less from publication and more from patenting in terms of sales growth. -Large firms tend to benefit more from publications and less from patenting in terms of sales growth.

Summary Models: 3 Alternative Explanations Internal Capital markets: -Access to internal capital markets allows larger firms to overcome asymmetric information problems. -These are big in high risk basic research. -Large firms have a comparative advantage in basic research. Financial Constraints: -Basic research is particularly hard to finance externally. -Current profit is increasing in employment. -Large firms have a comparative advantage in basic research. Diversification: -With n product lines applied research always fits and basic research sometimes fits the existing portfolio at prob h(n). -Larger n increases probability that innovation fits. -Large firms have a comparative advantage in basic research.

Summary And they conclude that the facts are consistent with all 3 models. A well balanced, well written, well documented paper that addresses an important issue: Does size matter? …for the type of innovation firms will undertake. This seems to be the case and would have important policy implications. Large firms need a different approach than small firms as they do different things.

Discussion The results are robust and the models are internally consistent… …but… -All models predict that small firms will engage in patentable applied research more than large firms. -I would argue they do not explain your result that they are actually more effective at doing so and making their patents pay-off in sales. -All models assume that basic and applied research are substitutes within time. -I would argue they are complements over time. A firm that has done basic research in the past is more effective at doing complementary applied research. -Knowledge accumulates over time so more dynamic models of innovation are probably more adequate. -Which brings me to an alternative interpretation of your results.

Discussion A Life Cycle Interpretation of your results: Assume size proxies for life cycle stage. (Young firms are small, small firms not necessarily young) A young (small) firm engages in product development. (Which is patentable, not publishable) Competition in early stage is driven by quality not price. (Firm sales growth depend on successful product development=patents) A mature (big) firm engages in portfolio management. (It has more means and casts a wider net as existing product lines are stalling. Its research is therefore more basic, generating publications) Competition is driven by price not quality. (So a mature firm will patent process innovations (a lot actually) and publish basic research but only their publications correlate with successful escape competition innovations that will increase sales/profits as their cost reductions are matched by competitors)