Small firm-large firm relationships can impact small firm innovation. While such relationships can combine advantages to promote innovation, tensions may also exist. Limited data on relationship size and impacts exists due to survey limitations. More research is needed on factors supporting innovative small firm engagement in large firm supply chains and ecosystems. Relationship dynamics, impacts beyond technology, stable sectors, and management practices require further study.

1. Small firm-large firm relationships and
the implications for small firm
innovation: What do we know?
Dr Andrew James*, Dr Sally Gee*, Prof Jim Love**,
Prof Stephen Roper*** and Jack Willis*
* Manchester Institute of Innovation Research, Manchester Business School, University of
Manchester, UK
** Aston Business School, Aston University, UK
*** Warwick Business School, Warwick University, UK
DRUID Society Conference 2014 on ENTREPRENEURSHIP - ORGANIZATION
– INNOVATION, Copenhagen Business School, Denmark 16-18 June 2014

2. Rationale for the paper
• Long-standing debate on the relative innovativeness of large
and small firms (Acs and Audrestch, 1987; Tether, 1998)
• Much less research on the impact of relationships between
large & small firms on innovation in smaller firms
• Few explicit studies despite extensive literature on SME
innovation, increasing focus on open innovation & SMEs,
SMEs in innovation ecosystems, SMEs in supply chains
• Rothwell (1989) published 25 years ago but remains seminal
work

3. A typology of
small firm-large firm relationships in innovation
Vertical/supply chain relationships: oriented around the flow of material goods &
service
Subcontracting relationships Producer-customer/user relationships
Knowledge creation & exchange relationships: internalising knowledge
Large firm-small firm
collaborations
Licensing agreements Knowledge-informed
acquisitions
Knowledge creation & exchange relationships: stabilising divisions of innovation
activity
Contract research Corporate venturing Open innovation
ecosystems
(adapted by the authors from Rothwell, 1989)

4. Dynamic complementarities between
large & small firms
• Certain relationships can effectively combine the advantages of
large firms & SMEs to promote technological innovation (Rothwell,
1989; Arora & Gambardella, 1990; Rothwell & Dodgson, 1994)
• Behavioural advantages of some SMEs: entrepreneurial dynamism,
internal flexibility, responsiveness to changing circumstances
• Material advantages of large firms: greater financial & technological
resources for innovation; large scale investment in production
facilities; regulatory capabilities; extensive distribution networks &
channels to market; financial capacity to undertake longer time-to-
market investments
• Extent of dynamic complementarities may vary between sectors &
over the industry life cycle

5. Vertical relationships:
demand networks & supply chains
• Vertical relationships with customers & suppliers are the most
common form of external innovation linkage for SMEs
(Brunswicker & Vanhaverbeke, 2011) & have the largest impact on
innovation in SMEs (Nieto & Santamaria, 2010)
• SMEs who are proactive in strengthening vertical relationships
have higher innovation performance than other SMEs (Lasagni,
2012)
• Large firms tend to be the focal organisations in many of these
demand networks & supply chains but we know very little
about their engagement of SMEs as sources of innovation

6. Horizontal relationships:
open innovation, alliances & networks
• Open innovation literature emphasises the growing role of external
knowledge networks & routes to commercialisation in business strategy as
a means to overcome resource constraints and improve innovativeness &
competitiveness of firms (Chesbrough, 2003; Chesbrough, 2006)
• SMEs may rely more heavily on external knowledge networks than large
firms (Rogers, 2004) & strength of alliance networks of start-ups may lead to
significant differences in their subsequent innovative performance (Baum et
al, 2000)
• Engagement in open innovation networks may be a particular challenge
for SMEs since they may lack the breadth of technological knowledge
necessary for broad partnerships; lack the ability to efficiently protect
their intellectual property; and have lower absorptive capacity (van de
Vrande et al, 2009; Chesbrough, 2010)
• Open innovation strategies of large firms emphasise effective engagement
of external sources of innovative capabilities wherever they reside,
including SMEs but we know very little about how large & small firms
interact in open innovation ecosystems

7. Tensions in the SME-large firm
relationship may have an impact on SME innovation
• “Lean” supply chain management practices may be reducing
opportunities for SMEs (Dowdall, 2004; Rutherford & Holmes, 2008)
• Where a focal (large) firm has a monopoly or oligopoly
position, this may suppress radical/disruptive innovation in
the supply chain (Afuah, 2002; Kaufman et al, 2003) & opportunities
for innovative SMEs in the supply chain (James, 2012)
• In some sectors, large firm practices may have led (SME)
suppliers to invest less in new product development &
innovation (UK Competition Commission, various)

8. Limitations of data
from innovation surveys
• Much of the data on small firm-large firm relationships comes
from qualitative case studies or supply chain analyses
• Econometric or statistical analysis of small firm-large firm
relationships & impacts on small firm innovation are limited,
due in part to limitations of most innovation surveys
• Community Innovation Survey (CIS) provides some
information on innovation partnerships but not size of
partners:
– Whether a firm collaborated with suppliers, customers, etc as part of
its innovative activity
– Subjective indication of importance
– Other sources of innovation (patents, standards, etc)

9. What do we need to know?
• There is virtually no specific evidence on the size of the firms with which
SMEs interact or on whether interactions with firms of different sizes have
differential effects with regard to SME innovation
• Limited attention has been paid to the factors that may support or hinder
the engagement of SMEs in the supply chains of large firms & the
responsiveness of large firms to innovation from SMEs
• We know very little about how large firms and SMEs interact in open
innovation nor the creation & dynamics of large firm-SME relationships
within innovation ecosystems
• The focus of much of the research has been on technological innovation
yet large firm-SME relations may lead to other types of innovation (e.g. in
business processes)
• Most of the research has focused on new, growing technology sectors (e.g.
biotechnology) but what about stable/traditional sectors? What about the
service sector?
• There is little in the existing research on management practice: what SMEs
should do to maximise the innovation benefits of links with large firms &
overcome the challenges