by Lawrence M. Rausch[1]

U.S. small business is closely associated with the development of new technologies in many of the science-based industries likely to be important to future economic growth. Without the organizational barriers that often impede risk taking at larger companies, small businesses produce many of the radical innovations that lead to groundbreaking new products and even new industries. From air conditioning to optical scanners, from solid fuel rocket engines to personal computers, small-business innovations have helped to transform American society while making important contributions to national economic growth (National Science Board 2008; Schramm 2006; Baumol 2002).

Until better data on a broader set of innovation-related indicators become available, an examination of research and development (R&D) performance by small firms can help to provide some indication of the role that they play in the nation's scientific enterprise (National Research Council 2005). Data on small-business R&D performance presented in this InfoBrief come from the annual Survey of Industrial Research and Development sponsored by the National Science Foundation (NSF) and the U.S. Census Bureau. The survey was designed to produce national level estimates of R&D performance. The sample includes companies in all size ranges across all non-farm industries, with an emphasis on large R&D performers. A majority of the 32,000 companies[2] sampled report no R&D activity.

Estimates presented in this InfoBrief for 'all companies' and for 'large companies' are more precise and have less sampling variability than estimates for 'small companies.' Reported differences for small companies may reflect sampling variability rather than actual differences because of the greater variability in the estimates for small companies. For this InfoBrief, the category of small business (or small firm) is defined as a company with fewer than 500 employees, the same definition used by the U.S. Small Business Administration.[3]

This InfoBrief looks at small-business R&D performance over the most recent five years for which data are available (2003–07) and the proportion of sales revenues different size companies devote to R&D. This report also presents data on small-business employment of scientists and engineers performing R&D.

Indicators of U.S. R&D Performance by Size of Company

Over the 5-year period, 2003–07, data indicate that R&D performance by U.S. small companies grew slightly faster than R&D performance by larger U.S. companies implying a larger share of the total U.S. industrial R&D in 2007 than 4 years earlier (table 1). In 2003, small U.S. firms spent close to $36 billion and accounted for 17.9% of U.S. industrial R&D performance. By 2007, R&D spending by small firms was about $50 billion and its share of all U.S. industrial R&D was 18.7%.[4]

  Table 1 Source Data: Excel file

The national rate of growth in R&D performance by all U.S. companies during 2003–07 was 4.5% after adjusting for inflation; whereas data indicate the rate for all small businesses (employing fewer than 500 employees) was 5.6%.[4] During the 5-year period examined, R&D performance by firms with 50–99 employees grew at an average annual, inflation-adjusted rate of 16.7%, and their share of total industrial R&D rose from 2.4% to 3.7%. Data indicate R&D performance by microfirms, those with 5–24 employees, also grew rapidly though at a slightly slower average annual rate of 14.7%, and their share of U.S. R&D went from 2.8% in 2003 to 4.0% in 2007.[4] Within the medium- and large-firm group, only firms with 10,000–24,999 employees showed rates of R&D growth substantially above the national average. For firms in this category, R&D performance increased at an average annual, inflation-adjusted rate of 11.1% during 2003–07, and their share of R&D rose from 13.4% to 17.1% (figure 1).

  Figure 1 Source Data: Excel file

Indicators of R&D Intensity of Small Firms

Another perspective of business R&D performance and U.S. business participation in innovative activities is revealed by looking at the degree to which company revenues from sales are spent on R&D activities. This ratio is often termed the R&D intensity of industries or firms (table 1). This measure is actually an indication of the firm's commitment and focus on innovative activities as a core business activity.

U.S. microfirms really stand out on the R&D intensity measure. Microfirms spent 2.6% of company sales revenues on R&D activities in 2003, 10.1% in 2005, and 15.8% in 2007 (table 1).[5] However, the change over time reflects more a drop in company sales revenues than growth in R&D performance.

All small companies (less than 500 employees) spent 3.1% of company sales revenues on R&D activities in 2003, 7.4% in 2005, and 8.6% in 2007. Medium and large companies spent about 3.4% of company revenues on R&D over the same period. The R&D intensity for all U.S. companies that perform R&D was 3.5% in 2003, 3.7% in the next three years, and 3.8% in 2007.

Indicators of Employment of Scientists and Engineers by Small Firms

According to NSF's Survey of Industrial Research and Development, R&D-performing companies employed about 1.1 million scientists and engineers each year during 2003–07, and about one-quarter of these were employed by small businesses (table 2).[6] During this 5-year period, employment of scientists and engineers by U.S. R&D-performing companies overall was flat. Data indicate employment of scientists and engineers at microfirms grew at an annual rate of 7.8% during 2003–07, employing 6.1% of all scientists and engineers working at U.S. R&D-performing companies in 2007.

  Table 2 Source Data: Excel file

Another indicator of the focus on innovative activity by U.S. small firms is illustrated by taking the number of scientists and engineers performing R&D that they employ as a proportion of total company employment. By this measure, scientists and engineers performing R&D accounted for a 2003–07 period average of 13.3% of all employees at small firms, about twice the 6.1% percentage in medium and large firms. The role of R&D as a business activity in small firms is even more pronounced in the smaller size categories. R&D scientists and engineers accounted for 27.4% of total employment at R&D-performing microfirms on average during 2003–07 and 17.6% of total employment at U.S. companies with 25–49 employees. In the two largest company size categories, R&D scientists and engineers accounted for 7.6% of total employment in firms with 10,000–24,999 employees and 4.9% of total employment at firms with 25,000 or more employees (figure 2).

  Figure 2 Source Data: Excel file

Summary

This InfoBrief provides some indicators of the important and growing role of small business in the nation's scientific and innovation-seeking enterprise. Indications are small business is performing increasing shares of U.S. industrial R&D, devoting large shares of company revenues to R&D, and employing large numbers of scientists and engineers relative to total company employment. Data for the smallest category within the small-business group, microfirms, suggests an even greater pattern of growth and emphasis on R&D than larger companies in the small-business category.

For further information contact Raymond M. Wolfe, Research and Development Statistics Program, Division of Science Resources Statistics, National Science Foundation, 4201 Wilson Boulevard, Suite 965, Arlington, VA 22230 (rwolfe@nsf.gov; 703-292-7789).

References

Baumol W. 2002. Entrepreneurship, Innovation and Growth: The David–Goliath Symbiosis, Journal of Entrepreneurial Finance and Business Ventures 7(2):1–10.

National Research Council. 2005. Measuring Research and Development Expenditures in the U.S Economy, p. 24.

National Science Board. 2008. Science and Engineering Indicators 2008. Chapter 6. NSB 08-01. Arlington, VA.

Schramm C. 2006. The Entrepreneurial Imperative, New York: Harper Collins Publishers. p. 58.

Notes

[1]  Lawrence M. Rausch (retired), Research and Development Statistics Program, Division of Science Resources Statistics, National Science Foundation, 4201 Wilson Boulevard, Suite 965, Arlington, VA 22230.

[2]  For-profit companies with five or more employees operating in the United States.

[3]  The NSF annual Survey of Industrial R&D does not cover companies with fewer than five employees.

[4]  Differences in growth rates and shares of total R&D are not significant at the 90% level and may reflect sampling variability rather than actual differences.

[5]  Differences in the ratios across years are not significant at the 90% level and may reflect sampling variability rather than actual differences.

[6]  Year-to-year comparisons show small business shares fluctuating within a narrow range (23.7%–26.5%).