Mega Firms are Big Innovators

Some of the country’s biggest companies are also its biggest innovators, finds a new working paper from the National Bureau of Economic Research that examines U.S. patent data, co-authored by professor Serguey Braguinsky of the University of Maryland’s Robert H. Smith School of Business. Other researchers have argued that big firms stifle competition by hoarding patents that they don’t actually use to create new products or technologies. But this research shows that’s not the case.

Mega firms – the top 50 firms by sales in a given year – aren’t just holding patents for strategic reasons; they are also developing novel patents, find the researchers. Novel patents are “innovations that introduce new combinations of technology components for the first time.” And big firms have an increasingly big role in creating more of these in recent years.

Looking at sales and patent data, lead author Braguinsky and his co-authors find that the pace of new combinations had declined over several decades until the mid 2000s, when things started to rebound. Mega firms played a big role in the trend reversal, says Braguinsky.

Why the turnaround?

Braguisky says it had to do with the rise of tech companies as the mega firms of the 2000s. Those companies increasingly integrated information and communication technology (ICT) and non-ICT components in their experimentation.

“The extent to which these new combinations generate follow-on innovation by other firms is high for mega firms even compared to VC-backed startups, which are the entities often considered to be at the heart of technological experimentation,” write the researchers.

The researchers also find that when mega firms develop novel patents, they spur the largest numbers of follow-on patents that use the same combinations of technology components, and they tend to generate more of those types of patents among other firms. This patent ripple effect is greater for mega firms than smaller firms.

“The share of economic activities accounted for by mega firms has dramatically increased over the past several decades and their innovation behavior has profound implications for economic growth, technological progress, and the appropriate policy response,” conclude the researchers.

“While mega firms may be increasingly protecting their technological superiority using patents in certain dimensions, we provide new evidence that they may also be leading technological experimentation by introducing new technology combinations and enabling other firms to conduct follow-on innovation,” they write.

Braguinsky, who is also a research associate with the National Bureau of Economic Research, wrote the research with Yuheng Ding, PhD ’23 , now with the World Bank, and UMD economics graduates Joonkyu Choi, PhD ’18 (Federal Reserve Board), Karam Jo, PhD ’20 (Korea Development Institute), and Seula Kim, PhD ’23 (Princeton University).

The research, titled “Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent Data ,” is a working paper.