The Gap Between Large and Small Companies Is Growing. Why?

Baruch Lev

By Vijay Govindarajan, Baruch Lev, Anup Srivastava and Luminita Enache

We find waning evidence for the idea that large companies do not innovate and that their business will soon be disrupted by small firms.

By Vijay Govindarajan, Baruch Lev, Anup Srivastava and Luminita Enache

Research and news headlines are replete with the idea that traditional large companies can’t innovate, and that smaller digital companies will render many larger ones extinct. While we’ve seen numerous startups of the last thirty years not only disrupt businesses but become the megacorporations of today, we wondered whether this disruption is accelerating with the momentum of digital revolution. In particular, we wanted to see whether large established corporations are being increasingly displaced by new technologies, or whether they’re actually leveraging digital and other new technologies to innovate and grow.

Contrary to the popular notion, we find that large corporations are more and more likely to maintain their dominant positions, while small corporations are less and less likely to become big and profitable. And part of the reason for this growing corporate divide between big and small firms is the growing R&D expenditures of large firms. Our results support Lou Gerstner’s thesis that the elephants are not basking in their past glory, but can indeed dance and are even becoming nimbler.

Read the full Harvard Business Review article.

Baruch Lev is the Philip Bardes Professor of Accounting and Finance.