The Exploration of Technological Diversity and the Geographic Localization of Innovation

Despite research pointing to the relationship between firm size and innovation, there exists strong evidence that small firms generate more innovations than large firms. However, these findings are influenced by variations in technological opportunities among industries and in geography. The conventional explanation for the role played by small firms in high innovation industries has been insufficient internal incentives and low flexibility in larger companies. This study offers two reasons for the innovativeness of small firms: they enter as start-ups and, as such, they receive funding because they explore new technological opportunities by innovating in less "crowded" areas; also, they are tied into local knowledge networks that support their explorations. The research examines the innovative activity of small and large firms through the study of patent data in the semiconductor industry. The study used two types of data: patent data relating to important semiconductor design innovations, and semiconductor plant location data used to identify relevant regions, which led to identifying 18 main regions. The analysis of patent data served to: a) examine the areas of technological exploration of small and large firms in the semiconductor industry (to establish whether small firms are more active in the less crowded technological fields) and b) to examine geographic patterns of knowledge dissemination for these firms (to analyze whether the diffusion of small firm research activities is more localized than that of larger firms). The research reveals that small firms (particularly start-ups) produce major innovations in less crowded technological spaces, while larger firms tend to concentrate in established fields with a larger concentration of innovative activity. Small firms are more closely tied into regional knowledge networks than large firms. If successful, start-up firms build upon this knowledge and branch into new fields. (AT)