The Innovation Paradox: From Hungry to Fat and Happy (but Less Innovative)
May 22, 2023 — In today’s business landscape, it’s common for big companies to scout for promising innovation in the startup sphere. In practice, a startup success story often ends in a sale to a big company. That scenario routinely places a hungry inventor-entrepreneur inside a bigger business. What happens next?
Recent research from the University of Chicago and the U.S. Census Bureau suggests a startling trend: inventors who move from smaller firms to larger ones while receiving a boost in pay and potential benefits tend to experience a decline in innovative output.
The findings come from a recent study on inventor employment history in the United States and the effects on innovative capacity, using data from over 760,000 U.S. inventors and their patent data. The results? Inventors are more likely today to work for larger companies and less for smaller firms. When hired by a big company, they do better financially (experiencing a pay raise of 12.6% on average), but their innovative output decreases by 6% to 11% compared to their time at smaller firms.
This trend over time may lead to an overall decline in innovation in the United States. Inventor-entrepreneurs are not born every day, and the lifestyle of high risk with delayed reward is not for the faint of heart. The transition to larger companies and lower innovation output could be due to a number of factors, such as misaligned incentives, increased bureaucracy, and a sense that big institutions are more risk-averse.
Not everyone is convinced that the movement of inventors to large firms has negative implications for innovation. A 2020 analysis by Robert Atkinson, founder of the Information Technology and Innovation Foundation, found that the United States still produces valuable startups. Atkinson concluded that big firms have the potential to get much more out of the money they spend on R&D than their smaller counterparts if they engender a collaborative innovation culture.
Making innovation easier is a daunting challenge. One potential solution is to elevate inventors to higher positions when they join a big company. A study from 2019 found that companies with inventors in CEO positions filed a greater number of patents and more valuable patents in technology classes where the CEO’s experience lies. Promoting inventors to more powerful positions—with the resources to pursue creative work—may accelerate innovation at big companies.
Another way to counter the decline in innovation is to foster an environment for innovation to thrive. UIDP member and tech giant Microsoft recently reinvigorated its innovation culture, highlighted in a Harvard Business Review article. When current CEO Satya Nadella took over in 2014, he announced that it was time to rediscover the soul of Microsoft. To foster more innovation within the company, Microsoft took intentional steps to remove bureaucratic barriers for engineers and to reignite a creative culture. Innovation cannot be bought; instead, it must be nurtured (and rewarded) in the right environment.
Why it matters
University-industry partnerships provide fertile ground for innovation by combining promising research outputs with the potential for rapid translation to market. University-based startups offer companies an avenue to identify promising researchers and their ideas, then help scale remarkable technology and processes. U-I partnerships contribute to innovation ecosystems, promoting interdisciplinary collaboration regionally and allowing inventors to take advantage of the diverse funding, expertise, and resources to further their innovative output.
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