Business insight: Innovation and high-growth companies

Professor Vania Sena, who is part of our Marketing, Entrepreneurship and Global Strategy group at th

Professor Vania Sena, who is part of our Marketing, Entrepreneurship and Global Strategy group at the Essex Business School - Credit: Archant

The UK policy debate on job creation revolves around the performance of the high-growth firms, ie, firms with 10 or more employees which experience above-average growth over three years. Although sometimes they are considered to be the same, they do not coincide with the “gazelles” which are defined as a sub-set of high-growth firms born five years (or less) before the end of a three-year period.

Although the policy interest is relatively recent, researchers have been interested in high-growth firms for a while, mostly because of their contribution to job creation. Research has mostly tried to establish some empirical facts about high-growth firms.

They can be in all sectors, tend to be younger than the rest of firms and may be more R&D intensive than other growing firms. They may overlap with the SMEs even if in reality high-growth can be experienced by large firms as well.

They also confirmed that for the US and UK, this segment of the firms’ population is the central driver of the aggregate job creation.

However, not much is known about the drivers of high growth. Typically, firms which achieve high-growth are also those which innovate more frequently. Evidence from the UK shows the centrality of innovation for high-growth firms. The analysis conducted by Mason et al. for Nesta suggests that high-growth firms tend to be more innovative than other firms in the economy. Also, they find that high growth firms whose share of sales from new products improves experiences an improvement to its employment growth rate.

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Evidence on the characteristics of the process which leads to the production of innovation among high-growth firms is very scarce. High growth firms are less likely to experience barriers to innovation than their slow-growth counterparts which is consistent with the fact that high growth are more likely to be either product or process innovators.

There is also some limited evidence on the types of collaborators high-growth firms prefer to work for the purpose of innovation. For instance, some researchers have found that high-growth SMEs in Northern Europe are more likely to collaborate on innovation with universities and other firms than high-growth SMEs from Southern Europe.

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In terms of the resources used by high-growth firms, some authors have focused on the investment in R&D and found that some high-growth firms can be more R&D intensive than slow-growing firms.

Our research on innovation among high growth firms shows two things:

1) Investment in intangible assets (ie, non-physical assets) matters for innovation among high growth firms. We test whether high-growth firms benefit more from their investment in intangible assets than slow-growth firms. The results show that high-growth firms which invest in training are more likely to introduce a product or process innovation. Also investment in software among high-growth firms is positively associated to their propensity to introduce a product innovation (but not a process innovation).

2) The environment matters. R&D spillovers from high growth neighbouring firms are positively associated to the propensity of high-growth firms to be product innovators. Also, high-growth firms which collaborate with suppliers and source information from them are more likely to be process innovators.

The key policy implication is that the government can contribute to foster innovation among high growth firms in two ways:

First, it can help create an environment where knowledge spillovers from both patents and investment in R&D can freely circulate. Our results show the importance of the spillovers generated by nearby firms (of either type) for high-growth firms and this suggests that creating the conditions for the clustering of the economic activities still makes sense.

Second, the government can facilitate firms’ investment in intangible assets which can help trigger high growth episodes. Typically, governments tend to support investment in R&D though tax breaks but in reality the changing structure of the economy suggests that other types of intangible assets may be more important than investment in R&D to trigger innovation among high-growth firms.

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