Small businesses are accounting for a smaller fraction of new technology creation than they used to, at least according data from the U.S. Patent and Trademark Office (USPTO). That trend has many policy makers and pundits concerned that our innovation system is handicapping small business.
While that explanation is possible, I think a more basic story accounts for the trend. Small business is a shrinking fraction of the U.S. economy.
What’s Behind the Decline in Patents Granted to Small Entities?
Let’s start with the facts. As the figure below shows, the share of patents awarded to small entities declined from 25.9 percent in 2001 to 19.0 percent in 2015. While the pace of the decline has moderated in recent years, the size of this decrease remains substantial. Small entities account for a much diminished slice of technology creation than they once did.
Some observers have argued that this decline reflects growing obstacles to small business innovation. The cost of patenting has risen in recent years, this school of thought argues, making it more difficult financially-constrained small businesses to pursue patent protection for their technological innovations. The USPTO has become less likely to grant patent applications in recent years, coming down particularly harshly on small businesses, research shows. A slowdown in the processing of patent applications makes it more difficult for small businesses to use the patent system to protect their products and services against imitation by competitors since patents are being awarded too slowly to be of much value to them. Finally, patent infringement lawsuits have become more common and costly to prosecute, making it more difficult for small businesses to enforce their patent rights in court.
While the obstacles-to-small-business-innovation argument for the decline in the small business share of patents is certainly plausible, I believe that a simpler explanation is more likely. Small business’s share of patents has declined simply because small business’s share of the economy has fallen.
Much data shows that small business accounts for a smaller slice of the private sector now than it did in the 1980s, 1990s, and 2000s. Consider a few statistics. Between 1998 and 2011, small business’s share of U.S. private sector payrolls declined from 48.6 percent to 42.0 percent. The share of the labor force employed in small companies fell from 54.5 percent in 1988 to 48.4 percent in 2013. In 1998, small businesses accounted for 50.5 percent of private sector GDP, but in 2011 they contributed less than 45 percent.
Policy makers should certainly investigate the causes for the decline in small business’s contribution to U.S. inventiveness. But I think they will find it is proportion to what has happened to small business in general.
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