Innovation success in small and larger firms: Does persistence and diversity in R&D matter when building a unique knowledge base?

Abstract This paper examines the research and development (R&D) strategies used by small and larger firms to build a unique knowledge base and drive innovation. We focus on two key strategic choices firms face: (1) Whether to engage in persistent or intermittent R&D; and, (2) How diverse to make their R&D portfolio. Studies show that each of these choices have important effects on firm-level innovation. Theory suggests that the mechanisms by which persistent/intermittent R&D and R&D diversity influence knowledge base development will vary considerably with firm size. Our study is the first to examine the relationship between firm size, persistent/intermittent R&D, and R&D diversity in how firms develop a unique knowledge base for innovation. To explore these issues, we construct a rich dataset for Ireland, containing 743 firms observed each year from 2012 to 2018. In each of these years, firms were asked to identify whether they engaged in 14 distinct R&D areas. This novel data enables us to identify firms’ consistent patterns of strategic R&D investment behaviour. Following this approach, we measure firms’ R&D strategies over the entire sample period, and sales from new products at the end of the period. Results from our analysis suggest that persistent R&D is more effective for small firms, whereas the persistent/intermittent R&D choice is less important for larger firms. R&D diversity negatively affects small and larger firms’ innovation success, but this negative effect is more pronounced in larger firms. Our results suggest key policy and managerial implications.