It seems to be paradoxical that, at the beginning of the 1990s, when technical change seemed to play an unprecedented role in the U.S. welfare, that small firms emerged as a driving force of the U.S. economy. It is usually assumed that technological change requires the quantities of research and resources that giant corporations amass and organize. In response to this phenomenon, this study explores two major concerns: (1) the role of small firms in innovation; and (2) the manner in which market structure, and the firm-size distribution in particular, respond to technological change. The research examines these questions through the lens of industrial organization, analyzing them in the context of the structure-conduct-performance paradigm. The study tests existing hypothesis concerning industrial organization, many of which had never been previously tested duet o data constraints, by applying the newly created SBA data. Two new important data sources are introduced: the Small Business Administration Data Base (SBDB), which provides measures of economic activity by firm size, and Small Business Innovation Data Base (SBIDB), which involves a direct measure of innovation activity by firm size. These data enable a systematic empirical analysis of innovation and firm size. The report describes these datasets, compares them with more traditional data measures, and provides qualifications about the applicability and reliability of the data. The SBIDB data is then used to identify the determinants of innovative activity, and to find out whether those determinants are different for large and small firms. The innovative activity of small firms is found to make an important contribution distinct from that of large firms. The research also shows that industry innovative activity tends to decrease as the level of concentration increases. A model is presented that leads to the hypothesis that four distinct factors are responsible for the presence of small firms in any given industry: (1) the exogenous stock of entrepreneurial talent, (2) a stochastic element of managerial and entrepreneurial talent, (3) economies of scale and capital requirements, and (4) the entrepreneurial strategy deployed by small firms. This hypothesis is tested utilizing a cross-section of manufacturing industries, including a wide spectrum of firm sizes. The analysis also examines the extent of small firms in manufacturing industries. Concludes with the development of a model explaining the inter-industry variation in the presence of small firms. A new measure, employment-weighted gross entry, or births, in order to compare how the patterns of entry vary across firm size, with the traditional measures of entry, and how they are affected by the innovative activity of large and small firms. Two results of the study are: (1) that firms are apparently not deterred from entering industries that are capital-intensive, and (2) that, while the innovative activity of small firms is found to promote the entry of firms of all sizes, the extent of both total innovative activity and R&D intensity is found to inhibit entry. Concludes with a discussion of the role of innovation and firm size in intra-industry dynamics. The study investigates the differences between the growth rates of small and large firms, and examines the validity of the assumption underlying Gibrat's Law. It also tackles the question of what determines the extent of turbulence, or firm movements into, within, and out of an industry, and whether these determinants are different for small and large firms? Overall, small firms play an important role in the process of technological change. They generate market turbulence, competition, and industry renewal. Small firms are effective competitors in international high-tech arenas that require flexibility and the ability to respond to niche markets effici.
