The Elixir or Burden of Youth? Exploring differences among start- ups and established firms in innovation behaviour in the UK Paola Criscuolo, Nicos Nicolau.

The Elixir or Burden of Youth? Exploring differences among start-

ups and established firms in innovation behaviour in the UK

Paola Criscuolo, Nicos Nicolau andAmmon Salter*

* Advanced Institute of Management Research

Objectives

• Utilise the improved information on CIS 4 about date of birth of new firm

• Analyse the innovative activities, the appropriability and search strategies of start-ups

• Compare the behaviour of start-ups vs. established firms

• Examine patterns in comparison to internal corporate ventures (start-ups that are part of group)

Start-ups and innovation

• Strengths– Not burdened by history

– Strong entrepreneurial spirit – risk taking

– Informal and personal culture – organic

• Weaknesses– Lack of resources – finance, people and technology

– Liabilities of newness and smallness

– Lack of complementary assets

– Underdeveloped relationships with suppliers and customers

Data

Question 4

NOYES

Question 1

YES

NO

Start-up(1,619)

9.8% CorporateVenture

(798)4.8%

Established firm

Established firm

Size differences across firm types and sectors

Low-Tech Manufacturing High-Tech Manufacturing Start-up Ventures Established Start-up Ventures Established From 10 to 49 employees 209 67 1,672 75 26 722 (%) 76.3 42.7 54.8 76.5 36.6 49.0 From 50 to 249 47 45 803 14 22 369 (%) 17.2 28.7 26.3 14.3 31.0 25.1 From 250 to above 18 45 574 9 23 382 (%) 6.6 28.7 18.8 9.2 32.4 25.9

Total 274 157 3,049 98 71 1,473

Traditional Services Knowledge Intensive Services

Start-up Ventures Established Start-up Ventures Established From 10 to 49 employees 605 145 3,445 339 125 1,668 (%) 83.0 46.0 57.8 65.4 49.0 47.0 From 50 to 249 82 86 1,363 105 68 942 (%) 11.3 27.3 22.9 20.3 26.7 26.6 From 250 to above 42 84 1,151 74 62 937 (%) 5.8 26.7 19.3 14.3 24.3 26.4 Total 729 315 5,959 518 255 3,547

Size differences across firm types and sectors

Low-Tech Manufacturing High-Tech Manufacturing Start-up Ventures Established Start-up Ventures Established From 10 to 49 employees 209 67 1,672 75 26 722 (%) 76.3 42.7 54.8 76.5 36.6 49.0 From 50 to 249 47 45 803 14 22 369 (%) 17.2 28.7 26.3 14.3 31.0 25.1 From 250 to above 18 45 574 9 23 382 (%) 6.6 28.7 18.8 9.2 32.4 25.9

Total 274 157 3,049 98 71 1,473

Traditional Services Knowledge Intensive Services

Start-up Ventures Established Start-up Ventures Established From 10 to 49 employees 605 145 3,445 339 125 1,668 (%) 83.0 46.0 57.8 65.4 49.0 47.0 From 50 to 249 82 86 1,363 105 68 942 (%) 11.3 27.3 22.9 20.3 26.7 26.6 From 250 to above 42 84 1,151 74 62 937 (%) 5.8 26.7 19.3 14.3 24.3 26.4 Total 729 315 5,959 518 255 3,547

Sectoral and geographical distribution

• 10% of start-ups are in construction and hotel & restaurant sectors and 19% are in the other business activities sector, which includes:

– Business & management consulting, legal & account activities, architectural & engineering consulting, advertising, recruiting agencies

• Start-ups are concentrated in the South-West & the Midlands, while corporate ventures are mostly found in the South-East, North-West & London

Innovative Performance

Low-Tech ManufacturingStart-up VenturesEstablished Start-up Ventures Established

Innovation active* 37.2 46.5 45.4 53.1 60.6 60.6Product Innovators 28.1 41.4 35.0 45.9 56.3 52.1Process Innovators 21.9 28.7 26.1 21.4 35.2 31.8New Corporate Strategy 17.3 38.1 18.4 31.3 44.3 26.0Advanced Management Techniques 12.9 21.9 16.3 20.8 30.0 22.8New Organizational Structure 14.4 41.3 21.6 31.3 48.6 32.8

Traditional ServicesStart-up VenturesEstablished Start-up Ventures Established

Innovation active* 18.8 35.6 23.8 46.9 54.1 44.9Product Innovators 15.8 28.3 17.9 34.2 44.3 33.0Process Innovators 6.9 14.0 11.6 29.5 33.3 25.6New Corporate Strategy 12.4 25.7 14.3 26.8 39.2 25.3Advanced Management Techniques 9.0 22.4 15.1 18.6 23.6 21.9New Organizational Structure 11.0 26.6 16.4 26.8 39.6 29.1

High-Tech Manufacturing

Knowledge Intensive Services

Innovative Performance

Low-Tech ManufacturingStart-up VenturesEstablished Start-up Ventures Established

Innovation active* 37.2 46.5 45.4 53.1 60.6 60.6Product Innovators 28.1 41.4 35.0 45.9 56.3 52.1Process Innovators 21.9 28.7 26.1 21.4 35.2 31.8New Corporate Strategy 17.3 38.1 18.4 31.3 44.3 26.0Advanced Management Techniques 12.9 21.9 16.3 20.8 30.0 22.8New Organizational Structure 14.4 41.3 21.6 31.3 48.6 32.8

Traditional ServicesStart-up VenturesEstablished Start-up Ventures Established

Innovation active* 18.8 35.6 23.8 46.9 54.1 44.9Product Innovators 15.8 28.3 17.9 34.2 44.3 33.0Process Innovators 6.9 14.0 11.6 29.5 33.3 25.6New Corporate Strategy 12.4 25.7 14.3 26.8 39.2 25.3Advanced Management Techniques 9.0 22.4 15.1 18.6 23.6 21.9New Organizational Structure 11.0 26.6 16.4 26.8 39.6 29.1

High-Tech Manufacturing

Knowledge Intensive Services

Information sources

Low-Tech Manufacturing High-Tech Manufacturing Start-up Ventures Established Start-up Ventures Established

Suppliers 53.9 61.3 56.6 68.8 67.1 61.5Customers 58.3 65.8 60.1 67.7 82.9 70.9Competitors 40.6 50.3 40.3 54.2 54.3 47.7Consultancies & private R&D labs 17.3 18.1 16.1 22.9 31.4 24.9Universities 7.4 7.7 8.9 13.5 20.0 15.9Governments 7.0 6.5 6.6 7.3 14.3 11.8

Traditional Services Knowledge Intensive Services Start-up Ventures Established Start-up Ventures Established

Suppliers 37.4 49.0 43.4 46.8 54.4 49.0Customers 46.1 58.2 48.0 58.9 66.0 57.5Competitors 33.2 46.7 33.4 43.8 47.6 40.8Consultancies & private R&D labs 11.4 14.1 12.5 17.8 23.6 18.7Universities 4.3 3.9 5.0 8.8 14.4 9.7Governments 6.0 8.5 6.5 12.7 17.2 11.2

Innovation sources

Low-Tech Manufacturing High-Tech Manufacturing Start-up Ventures Established Start-up Ventures Established

Suppliers 53.9 61.3 56.6 68.8 67.1 61.5Customers 58.3 65.8 60.1 67.7 82.9 70.9Competitors 40.6 50.3 40.3 54.2 54.3 47.7Consultancies & private R&D labs 17.3 18.1 16.1 22.9 31.4 24.9Universities 7.4 7.7 8.9 13.5 20.0 15.9Governments 7.0 6.5 6.6 7.3 14.3 11.8

Traditional Services Knowledge Intensive Services Start-up Ventures Established Start-up Ventures Established

Suppliers 37.4 49.0 43.4 46.8 54.4 49.0Customers 46.1 58.2 48.0 58.9 66.0 57.5Competitors 33.2 46.7 33.4 43.8 47.6 40.8Consultancies & private R&D labs 11.4 14.1 12.5 17.8 23.6 18.7Universities 4.3 3.9 5.0 8.8 14.4 9.7Governments 6.0 8.5 6.5 12.7 17.2 11.2

Protection methods

High-Tech ManufacturingStart-up Ventures Established Start-up Ventures Established

Registration of Design 14.4 18.7 19.5 25.0 35.7 30.1Trademarks 12.9 23.2 22.7 22.9 40.0 35.8Patents 11.8 20.7 18.9 29.2 44.3 37.1Confidentiality Agreements 26.2 36.8 29.6 40.6 64.3 49.6

 Traditional Services Knowledge Intensive ServicesStart-up Ventures Established Start-up Ventures Established

Registration of Design 4.9 9.9 8.0 9.6 15.2 10.3Trademarks 10.3 18.8 11.6 13.5 21.6 15.5Patents 4.3 9.2 6.6 9.4 19.6 11.2Confidentiality Agreements 11.6 20.7 14.5 34.1 50.8 35.9

Low-Tech Manufacturing

Protection methods

High-Tech ManufacturingStart-up Ventures Established Start-up Ventures Established

Registration of Design 14.4 18.7 19.5 25.0 35.7 30.1Trademarks 12.9 23.2 22.7 22.9 40.0 35.8Patents 11.8 20.7 18.9 29.2 44.3 37.1Confidentiality Agreements 26.2 36.8 29.6 40.6 64.3 49.6

 Traditional Services Knowledge Intensive ServicesStart-up Ventures Established Start-up Ventures Established

Registration of Design 4.9 9.9 8.0 9.6 15.2 10.3Trademarks 10.3 18.8 11.6 13.5 21.6 15.5Patents 4.3 9.2 6.6 9.4 19.6 11.2Confidentiality Agreements 11.6 20.7 14.5 34.1 50.8 35.9

Low-Tech Manufacturing

Matching estimator

• D = 1 if a firms is a new firm (treatment)

• Yi (1) outcome of the treated: the likelihood of introducing a new product that would be observed if the firm was a new firm

• Yi (0) outcome of the non-treated: the likelihood of introducing a new product for the same firm if it were not a new firm

• The sample average treatment effect on the treated (SATT):

– SATT=E[Yi(1) -Yi (0)|D=1]=E(Yi(1) |D=1)-E(Yi (0)|D=1)

• The SATT provides an answer to this questions:– How does being a new firm change the likelihood that a firm will be innovative

compared to what it would have experienced if it had not been a new firm?

Matching estimator (2)

• We can estimate E(Yi(1) |D=1) BUT we cannot estimate E(Yi (0)|D=1)

• The matching estimator uses the average outcome of some similar firms in some observable characteristics (X) who were not exposed to the treatment to estimate E(Yi (0)|D=1)

• Conditioning on a set of covariates (X):– SATT=E(Yi(1) |D=1, X)-E(Yi (0)|D=1, X)

Advantages of the matching estimator over regression analysis

• Non-parametric method thus it does not require a functional form specification (i.e. innovation function)

• Regression analysis is not concerned with how similar treated and un-treated groups are in the distribution of the covariates

Covariates used to match firms

Matching variables DescriptionFirm size Number of employeesR&D intensity R&D spending over turnoverMarket orientation Dummy equals to 1 if a firm operates internationallyRegional location 14 regions as defined in the CISSector 49 industry 2 digit sic code dummiesPart of a group 1 if a firm is part of an enterprise group

Outcome variables

Innovative Active 1 if introduced either a product or a process innovationProduct innovation 1 if introduced a product innovationProcess innovation 1 if introduced a process innovationProduct & process innovation 1 if introduced both a product and process innovationRadical product innovation 1 if introduced a product innovation new for the marketRadical process innovation 1 if introduced a process innovation new for the marketWider innovation Number of significant managerial or organisational

changesInnovation co-operation 1 if co-operated with other firms or institutionsLegal appropriability 1 if used any of the legal appropriability mechanismsInformal appropriability 1 if used any of the informal appropriability mechanisms

Degree of legal appropriability Number of legal appropriability mechanisms usedDegree of informal appropriability Number of informal appropriability mechanisms usedDegree of openness Number of external sources of information used

Effects of being a new firm in manufacturing

Measures SATT Std. Err. z P>|z|Innovation active -0.053 0.024 -2.25 0.024 -0.100 -0.007Product innovation -0.025 0.023 -1.08 0.278 -0.070 0.020Process innovation -0.012 0.021 -0.58 0.562 -0.054 0.029Product & process innovation 0.005 0.019 0.26 0.792 -0.033 0.043Radical product innovation -0.040 0.020 -2.04 0.041 -0.079 -0.002Radical process innovation 0.002 0.013 0.12 0.903 -0.024 0.027Wider innovation 0.188 0.057 3.28 0.001 0.075 0.300Innovation co-operation -0.026 0.017 -1.51 0.132 -0.059 0.008Legal appropriability 0.014 0.023 0.61 0.542 -0.031 0.058Informal appropriability 0.024 0.024 1.04 0.301 -0.022 0.071Degree of legal appropriability -0.001 0.078 -0.01 0.991 -0.154 0.152Degree of informal appropriability 0.040 0.055 0.72 0.469 -0.068 0.147Degree of openness 0.241 0.127 1.91 0.057 -0.007 0.489

[95% Conf. Interval]

Effects of being a new firm in services

Measures SATT Std. Err. Z P>|z|Innovation active 0.043 0.013 3.36 0.001 0.018 0.068Product innovation 0.042 0.012 3.45 0.001 0.018 0.065Process innovation 0.023 0.01 2.26 0.024 0.003 0.044Product & process innovation 0.024 0.009 2.74 0.006 0.007 0.042Radical product innovation 0.018 0.010 1.81 0.070 -0.001 0.037

Radical process innovation 0.016 0.007 2.35 0.019 0.003 0.029Wider innovation 0.141 0.033 4.25 0.000 0.076 0.206Innovation co-operation 0.005 0.010 0.49 0.623 -0.014 0.024Legal appropriability 0.056 0.012 4.69 0.000 0.032 0.079Informal appropriability 0.023 0.012 1.99 0.047 0.000 0.047Degree of legal appropriability 0.098 0.033 2.93 0.003 0.032 0.163

Degree of informal appropriability 0.058 0.026 2.28 0.023 0.008 0.108Degree of openness 0.169 0.074 2.26 0.024 0.023 0.314

[95% Conf.

Results

• New firms differ from established firms:– New firms are more innovative in services BUT not in

manufacturing– New firms are more open to use draw knowledge from

external sources and to adopt new organisational and managerial practices

– New firms are more likely to use appropriability methods in services

– New firms are no different from established firms in their pattern of collaboration

Policy Implications

• Distinguishing between new and established firms and not only between SMEs and large firms

• Policy should target new firms in manufacturing where the liabilities of newness may be stronger

• Encourage established firms to become more open to external knowledge sources

Limitations

• We only analysed the innovative behaviour of young firms with more than 10 employees

• We cannot compare firms with exactly the same age