The Relationship Between The Innovativeness & Survival Of Firms

The relationship between the innovativeness and survival of firms

The relationship between the innovativeness and survival of firms is one that has been thoroughly studied. Samuelsson and Davidsson’s paper looked in depth at the issue arguing that the pursuit of innovation brought with it additional risk, uncertainty and complication. Such factors often made companies less investable with their routes to market and business strategies needing to be less detailed and more flexible. In addition their revenues where often unpredictable and inconsistent. (SOURCE) Furthermore the need to legitimize novel products is a difficult and expensive task not faced by non-innovative startups. (SOURCE) A study by DeTienne in 2015 illustrated that due to the inherent risk in highly innovative startups that their management teams often took high risk decisions due to the inherent risk in the company to begin. This led to a lower survival rate for these highly innovative firms.

Many papers have however argued the contrary position with Schumpeter illustrating the great market power that innovative firms possess. Additionally highly innovative firms have been found to benefit from cheaper more efficient and innovative methods of production, and unique ability to technologically challenge their competitors and the flexibility to expand into neighboring markets. On the whole the literature indicated a positive correlation between highly innovative firms and a higher survival rate. Many newer studies however have illustrate the potential that the evidence presented is time and geography dependent and that it fails to properly account for the lack of funds in startups which often mean a single failure in an innovative firm leads to the death of the company.

Overall it is clear that the literature in this area of study is quite mixed, in addition the analysis of innovativeness is quite difficult in practice and much of the literature uses different definitions to define the terms. Much of the support for highly innovative firms is driven by policy reasons, it is important however to recognize that much of literature illustrates that innovative ventures fail to survive and create long standing local jobs in comparison to their less innovative counterparts. As such when making investment decision guided around the development of the local region it is likely that companies with smaller innovations should be supported over potentially disruptive innovations with the potential to alter industries or markets. These firms are simply sell likely to succeed and often fail to provide local, sustainable employment.