Barriers to Innovation among Small Firms: An Analysis of Argentine Firms

INTRODUCTION

There has been much debate on whether or not smaller firms are subject to a higher number of limitations with regards to innovation. A number of Argentine firms participated in the World Bank Enterprise Survey (2010). The survey makes use of variables that have been identified as contributive to innovation within firms. This report uses the data collected over a sample of these firms, to explore the effect of a firm’s size, on its ability and subsequent motivation to innovate. The data reveals that small firms are indeed subject to more restrictive elements when it comes to innovation. These elements include inferior organizational capital, financial restrictions, established competition in national and international markets as well as lower productivity due to fewer employees.

AN OVERVIEW OF FIRM CHARACTERISTICS

Note: Calculations based on the World Bank Enterprise Survey (2010). Labour productivity is measured by sales over employees.

In addition to this information, the data collected in the World Bank Enterprise Survey (2010), reflects that 53.6% of these firms are exporting, and 73.1% of them are innovating.

Figure 1: Distribution of Argentine Firms in Different Age Groups

Note: Calculations based on the World Bank Enterprise Survey (2010).

Figure 1 above, shows the number of firms that fall within the respective age groups. This is done to get an idea of what portion or percentage of the firms in the dataset are newer (and therefore smaller), and which ones are older (and assumed larger). The aim is to be able to separate the smaller firms from the larger firms in order to see if and how size affects innovation levels.

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From the graph, it is clear that majority (43%) of these firms are at least 30 years old, almost the same amount (42%) of them are between 10 and 30 years old. Less (12%), of them are between 5 and 10 years old, and even fewer (2%) are less than 5 years old.

It is no surprise that 73.1% of these firms are innovating, because a majority of them represent the older (larger) firms. These firms appear to be better able to innovate than the newer firms because they can afford to expand the business by hiring additional employees and increasing productivity.

GROWTH, INNOVATION AND EXPORT PARTICIPATION

Figure 2: Firm Employment by Age in the Cross Section

Note: Calculations based on the World Bank Enterprise Survey (2010). Employment in the youngest group (age<5 years) is normalized to 1

Figure 2 depicts the average number of employees in each firm age group, normalised to the first age group. This normalisation allows us to compare the effects of different factors (the age groups, in this case), irrespective of scale. Overall, we are able to see that, in these Argentine firms, the larger the size of the firm, the larger the average number of employees in that firm.

The shape of this curve is similar to that of the US, in the report of the Life Cycle of Plants (2014). Firms that are above 30 years old (group 5), have approximately 7 times more employees than firms aged 5 years and younger (group 1). What we can also see is that firms around 15 years old (group 3) are about half the size of group 5 firms. This means that there is further growth and progression that occurs as Argentine firms grow in size, labour-wise. As mentioned in the Life Cycle of Plants (2014), this can be due to a number of factors. Primarily, it would suggest a build-up of organizational capital, due to a conscious investment.

Figure 2 further affirms that larger firms (labour-wise, in this case) are better able to innovate than smaller firms.

Figure 3: Percentage of Innovators and Exporters by Firm Size

Note: Calculations based on the World Bank Enterprise Survey (2010). The category small includes firms with less than 20 employees, the category medium includes firms with 20-99 employees, and the category large includes firms with 100 or more employees.

Small firms make up 29.9% of the firms in the dataset, medium firms make up 40.2%, and large firms make up 29.9%.

Figure 3 above shows a summary of the differences in average innovation and exporting levels between firms of different sizes.

It is clear that large firms generate the highest levels of innovation and high levels of exports as well. Medium firms bring about the highest exports and almost as much innovation as large firms. On the other hand, small firms generate the lowest levels of both innovation and exports.

According to Chudnovsky et al. 2006, this information is not surprising in a developing country like Argentina. This is because many start-up businesses find themselves in contest with a continuous influx of imported goods from larger multinational firms. This is very challenging because often, when this happens, small firms are discouraged and it is often easier and more profitable to find work in these larger firms before they become bankrupt and subsequently, there is less and less chance for innovation within these small firms.

In addition to this, the larger firms are better able to maximise technological investments that allow for more efficient and effective means of production.

CONCLUSIONS

There are many factors that contribute to innovative opportunities; financial and organisational capital, a strong foothold in the market, a decent number of dedicated employees real-world business experience and expertise and more. Small firms in developing countries are lacking in most of these elements upon entrance into the market and therefore are unable to fully participate in innovation until they have grown a significant amount and established a presence in the market. Because of this, there are indeed numerous barriers for innovation within small firms.

References:

• Bertranou, F., 2016. Labour Institutions and Labour Market Performance in Argentina.
• Chudnovsky, D., López, A. and Pupato, G., 2006. Innovation and productivity in developing countries: A study of Argentine manufacturing firms’ behavior (1992–2001). Research policy, 35(2), pp.266-288.
• Hsieh, C.T. and Klenow, P.J., 2014. The life cycle of plants in India and Mexico. The Quarterly Journal of Economics, 129(3), pp.1035-1084.
• Nguyen, H. and Jaramillo, P.A., 2014. Institutions and firms' return to innovation: evidence from the world bank enterprise survey. The World Bank.