Patterns of growth of technology based on SMEs in Europe

Paola Giuri, Sant'Anna School of Advanced Studies, Pisa, Italy

This paper investigates the characteristics and the patterns of growth of small technology-based firms in Europe. The paper builds on the work of Arora et al. (2001) on the markets for technology, and wants to add novel empirical evidence on one area that is still largely unexplored, that is the strategies and the patterns of growth of the upstream specialized technology producers. In particular we aim to understand if technology-based firms grow by implementing business strategies based on the development and commercialisation of their technologies, i.e. by operating in the markets for technology, or by investing in technologies and complementary assets to compete in the markets for products and services.
Moreover, the growth of technology-based firms in Europe is increasingly becoming a crucial issue for the European competitiveness. The European report on SMEs (Eurostat, 2002) points out the crucial role of small and new technology based firms for the conversion of scientific and technological innovation in new products and processes. This paper aims to contribute to this issue by investigating the characteristics and the patterns of growth of technology-based SMEs in Europe. In particular it aims to provide an empirical basis to answer some relevant questions: do small firms grow by only focusing on technology development and commercialisation? If firms establish a strategy based on the supply of their core technologies, can they survive and grow with this strategy or do they need to move downstream by investing in manufacturing and distribution assets and capabilities? Can this strategy facilitate entry in markets where the development of complementary assets is too costly for new and small firms?
The existence and functioning of markets for technology is becoming a crucial issue in the recent literature on the division of innovative labour and the survival and growth of small technology-based firms. In a recent contribution, Hicks and Buchanan (2003) have argued that small “serial innovators”, that is small firms with a sustained, public record of successful technical advance, are often suppliers in the markets for technology. They compare some characteristics and the patenting performances of these firms with that of large firms, and find that the small serial innovators produce technology of higher quality, more broadly based and more closely linked to scientific research. Moreover, they observe that these firms are younger than large firms. Other recent works explored the determinants of commercialisation strategies of a sample of start-up innovators by distinguishing firms that adopted a cooperation strategy in the market for “ideas” (based on licensing, acquisitions, alliances) and firms adopting other strategies, considered by default as competing in the product market (Gans et al., 2002; Gans and Stern, 2003). Firms’ strategies depend in their work on the strength of intellectual property protection, the size of transaction costs and the existence of sunk costs of entry into the product market.
The interest in new serially patenting firms is also supported by the work of Kortum and Lerner (1999). In their analysis of the recent surge in US patenting, they point out that small and new firms are exploiting the patent system more aggressively and that their relative share of patents is substantially increased with respect to large firms. They suggest that the change in the management strategies of innovation strategies of large and small firms can represent one of the main relevant factors
In this paper we uncover some relevant characteristics of small and medium technology based firms in Europe and try to understand their strategies for growth. Following Hicks and Buchanan we select the European serial innovators to build our sample of technology-based firms. We use the European Patent Office (EPO) database to select our sample of serial innovators in Europe. For our purposes, we characterise serial innovators as European firms with at least five EPO patents for which they applied between 1990-1995. According to the EU standard parameter, a small firm is defined in our work as having less than 250 employees. We then use the databases WOW and D&B in several years in order to control for subsidiaries and mergers and acquisitions and to retrieve company employees, sales and primary and secondary sic codes in the period 1990-1995. We also use data from the SDC, ASAP and Promt databases from 1990 onwards and the company web sites to analyse the company history, activities and the description of several events related to the small firms technological strategies.
The choice of our period of observation is due to two main reasons. First, it is since the 1990s that we start to observe the rise of specialized technology producers that sell their technologies, disembodied from the final goods or the capital assets, to the downstream user firms (Arora et al., 2001). We then use this period to select and analyse the characteristics of serial innovators in Europe. Second, we aim to analyse a subsequent period - that is 1996 onwards - in order to observe the pattern of growth of the firms selected as serial innovators in the first period.
The empirical analysis contributes in three directions.
First, we describe the characteristics of the serial innovators in Europe, like sectoral distributon, technological specialization, patent citations, science linkage, etc., and highlight the difference across small, medium, and large firms. Specific patent indicators that we use seem to suggest that most of the technologies in which SMEs are more specialised are relative to engineering activities, mechanical elements and tools, materials and processes, that are technologies commonly supplied to larger firms. A relatively large amount of patents is concentrated in medical technologies for small and medium firms in the sample. Moreover, medium and small serial innovators tend to specialise in the technological fields in which they own a technological advantage, measured by the number of citations received.
Second, by focusing only on the sample of small firms we propose a taxonomy of strategies in which these firms can be classified. All firms in our sample invest persistently in innovation and patent their inventions, but they adopt different strategies for the exploitation of their technological assets. The careful analysis of the company history, activities and the description of the events included in the SDC, ASAP and Promt databases and in the company web sites allowed us to propose a taxonomy of firms strategies of technology exploitation and market competition. In particular we observe if the small firms’ technological strategy is based on the commercialisation of the technologies or if the firms also manufacture the products and compete in the final market. From the analysis of our sample of 140 small technology based firms we are able to propose a taxonomy of three main groups of competitive strategies in the “market for technologies”, in the “market for embedded technologies” or in the “market for products”. The three strategies are characterised by different levels of investments in complementary assets and therefore by different ways of appropriating the returns from the investments in technology. We discuss several case studies in each of the three groups that support our taxonomy.
Finally, we classify all companies in the three strategies and analyse the different characteristics of companies like patent quality, non patent citations, sectoral classification and technological specialization.

Date: 25 May-00 0000