Intracompany Governance and Innovation

In the United States most innovating firms are publicly-traded conglomerates - a substantial fraction of innovation is concentrated in private firms and business groups in continental Europe.

In Intracompany Governance and Innovation (NBER Working Paper No. 15304), authors Sharon Belenzon, Tomer Berkovitz, and Patrick Bolton find that while in the United States most innovating firms are publicly-traded conglomerates, a substantial fraction of innovation is concentrated in private firms and business groups in continental Europe. Business groups, the authors explain, "may take the form of pyramidal structures, where a single controlling company has direct or indirect controlling stakes in multiple subsidiary companies, or business alliances, where the companies in the alliance are connected through interlocking stakes."

The authors base their conclusion on data for a cross-section of private and publicly traded firms in the United States and 15 European countries. They match all of the corporate patents granted by the United States Patent and Trademark Office (USPTO) and the European Patent Office (EPO) to these firms. They single out firms that publish their research in academic journals and identify about 64,000 firms that hold at least one patent from the EPO or USPTO, or have published at least one scientific article in a scientific journal. Of these 64,000 firms, about 60 percent are American, 11 percent German, 8 percent British, 4 percent French, and 5 percent Italian. Germany appears to be the most innovative European country, holding 12 percent and 20 percent of USPTO and EPO patents, respectively. For scientific publications, about 70 percent of the articles are published by U.S. corporations, 10 percent by German corporations, and 3 percent by French and British firms.

Organizational form varies significantly across industries. For example, business groups tend to be concentrated in industries where innovation takes time, is highly uncertain, and where the intellectual protection of the innovator may be of paramount importance. Conglomerates, on the other hand, are more prevalent in industries with rapid, incremental innovation, and where their ability to promptly identify the relevant innovation and to quickly redeploy assets internally may give them an edge over business groups.

The authors also find that firms with substantial involvement in R and D tend to choose the corporate form that is most conducive to innovation. This is especially true in Europe, where there are fewer regulatory hurdles to the formation of business groups and to hybrid corporate forms. That is not the case in the United States, where tax and regulatory hurdles essentially eliminate any gains from forming business groups, and where a highly visible venture capital and private equity sector provides an alternative to business-group financing of R and D.

The authors note that the distribution of innovating firms in the United States is heavily skewed towards those that are publicly traded. The fraction of patents held by publicly traded American corporations is above 60 percent, while in Europe this fraction is only about 40 percent. In some large European countries, the share is even lower. In France, for example, publicly traded firms hold only 9 percent of U. S. Patent and Trademark Office patents and only 18 percent of European Patent Office patents; in Italy, the percentages are 3 percent and 7 percent, respectively. Also, in Europe the publicly traded innovating firms are more likely to belong to a business group: more than 40 percent of innovating firms in France and Germany belong to a business group, compared with only 2 percent and 1 percent respectively in the United States and Great Britain.

-- Lester Picker