The Canadian Economy in Transition

11-622-MIE

Innovation Capabilities: The Knowledge Capital Behind the Survival and Growth of Firms

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Innovation Capabilities: The Knowledge Capital Behind the Survival and Growth of Firms

by J.R. Baldwin and G. Gellatly

Executive summary

Capital, both tangible and intangible, drives the growth process. The recent emphasis on the importance of knowledge capital stems in part from the recognition that intangible capital contributes as much as physical capital does to a firm's success. The competencies of a firm flow from its knowledge and organizational capital.

This paper summarizes the findings of a research program aimed at outlining the importance of this form of intangible asset to a firm's growth. The program has consisted of two parts.

First, longitudinal databases have provided a rich set of studies on entry, exit, mergers and other aspects of dynamics related to growth and decline in firm populations. These studies have shown the pervasiveness of growth and decline in the firm population. However, by themselves, these studies do not demonstrate what competencies differentiate the most successful from the least successful. To do so, we need more detailed profiles of the producers found in the longitudinal data bases.

This paper describes a research agenda developed at Statistics Canada that has constructed a set of surveys that allowed profiles to be developed of growing and declining firms and then asked how differences in these profiles were related to the performance of firms.

The population of small firms is varied. Many will decline and exit the market place shortly after entry. Others will survive and grow. Some will innovate and surge ahead of their competitors. This paper outlines the strategic foundations associated with the firm growth process writ large. General business skills — basic capabilities related to management, financing and marketing — are competencies that young firms need if they are to survive their early precarious years. They derive from the organizational capital of a firm.

But the studies also tell us that specialized competencies related to innovation and technology management form the core of intangible capital in most firms — often proving to be the key distinguishing factors between a firm's success or failure. They tell us that specialized competencies related to innovation and technology management are strongly correlated with this growth process. These are specialized competencies that set high-growth firms apart from low-growth firms; they also discriminate between more and less successful firms based on more comprehensive measures of business performance, including an amalgam of changes in productivity, profitability and market share. The researches also tell us that firms support these innovation competencies by developing a network of supporting skills, including those related to human resource management, marketing, production and finance.

These findings emerge from studies that search for basic commonalities amongst small businesses, shared factors that help to explain differences in performance, or that serve to characterize large numbers of firms at a particular stage in their developmental process. Other studies shift the emphasis from generalities to specifics, focusing on the link between innovation and the competitive environment. Here our results show that innovative firms respond to different competitive pressures in terms of the set of strategies and activities that they pursue. The results show that there is no single path to innovation that transcends all market environments, as there is often a high degree of specificity that accompanies the innovation process.

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