Tuesday, December 05, 2017

Innovations from Big firms vs small firms and creative destruction

V Ananthnageswaran has a short blogpost titled Schumpeter and creative destruction where he made the following comment:

Public policy must be relentlessly focused on enabling firms to start reasonably ‘big’ and to be able to grow bigger. Subsistence entrepreneurship is romantic but will not move the economic growth needle much at all. It is disguised unemployment.
I think I understand what he means when he says "subsistence entrepreneurship will not move the economic needle." But here are my comments.
  1. Innovation has moved to big corporations because of the "gridlock" created by these large corporations using patents. [Referring to Micheal Heller's Gridlock Economy book] It is not naturally so. So I agree firms should be able to get "reasonably big" but how big?
  2. Other reason why big companies are innovating is because cost of capital spread between big and small firms has become wider with bigger firms being able to access ultra-low cost capital while smaller firms unable to match them. As readers will know I think too low interest rate over long times have led to development of automation technologies.
  3. Most new innovation coming from large corporations is not disruptive in true sense. But that coming from smaller start-ups occasionally is. I refer to the scale of disruption from these corporations rather than number of such innovations.
  4. Public policy should allow even smaller companies to disrupt established employers thus creating creative destruction in job market as well. How many policy makers will live with that idea when there is labor surplus remains to be tested.