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Why Are Private Companies More Innovative Than Public Companies?

09/11/2015


​MNP's TAKE: As the world of technology continues to evolve, everything is right at your fingertips. Building comprehensive strategies from software development to understanding the right applications and processes and how best to use them allows you to design the future of your business. 

Creating an internal culture of innovation and continuous improvement is essential to streamlining costs, satisfying evolving customer needs and positioning your business for greater success. For companies both public and private - investing in innovative solutions that will drive sustainable growth for your business, is an investment worth prioritizing. Innovation can be user friendly and there's no time like the present to get on board! 

To learn more about how to create customized strategies that will help keep your business on the pulse of innovation, contact John Hughes, MNP's National Leader of Private Enterprise at 1.877.251.2922 or [email protected]


BY PAUL SLOANE FROM BUSINESS2COMMUNITY​

Are private companies more innovative than public companies? What happens to an innovative start-up which goes public? Will the same team of people who were so agile and entrepreneurial in the start-up become even more innovative once they have some capital and recognition behind them? Apparently not.

Shai Bernstein of Stanford University compared firms that went public with similar firms that stayed private. His 2014 report, Does Going Public Affect Innovation?, found that when companies went public the quality of internal innovation declined and firms experienced both an exodus of skilled inventors and a decline in the productivity of remaining inventors. However, public firms can more easily attract new human capital and acquire external innovations. Bernstein says that, ‘going public causes a substantial decline of approximately 40 percent in innovation novelty as measured by patent citations.’ At the same time, he found no change in the scale of innovation, as measured by the number of patents. 

His conclusion is that these results suggest that the transition to public equity markets leads firms to reposition their R&D investments toward more conventional and safer projects. Furthermore he found that that the quality of innovation produced by inventors who remained at the firm declined following the IPO and key inventors were more likely to leave. The firms that went public were also more likely to generate spinout companies, suggesting that inventors who left remained entrepreneurial and would often go on to found their own businesses. These effects are partially mitigated by the ability of public firms to attract new inventors.

Bernstein points out that newly public firms often use their injection of capital to acquire companies in the years following an IPO. This helps drive innovation. He claims that the patents acquired are generally of higher quality than the patents produced internally following the IPO.

Going Public: How Stock Market Listing Changes Firm Innovation Behaviour is a 2015 paper by Simon Wies of Goethe University, Frankfurt and Christine Moorman of Duke University. They compared 207 consumer goods companies and a sample of over 40,000 new products between 1980 and 2011. They found that companies which go public produce more innovations than before but that those innovations are less bold. On average public companies launch 12% more product innovations than equivalent private companies but they produce fewer radical new products. The authors state’ that after going public, firms innovate at higher levels and introduce higher levels of variety with each innovation while also introducing less risky innovation, characterized by fewer breakthrough innovations and fewer innovations into new-to-the-firm categories.’ They say this is because going public increases capital which allows more innovations but it introduces ‘myopic incentives and disclosure requirements’ which can inhibit riskier innovation.

Many leaders of private businesses believe that going public can reduce a company’s incentive and ability to innovate. Ingvar Kamprad, founder of IKEA said, ‘Keeping companies like IKEA in private hands would secure the freedom to have a long term view on investments and in business development.’

Michael Dell undertook a leveraged buyout to take Dell private and reinvent its business strategy and to avoid the quarterly focus of the stock market.

Wies and Moorman report that innovation is inhibited in public companies because of ‘pressure to meet short-term earnings projections and to invest in projects with immediate and less risky payoffs that are easily valued.’ It looks as though we pay a heavy price in lost innovation because of the Stock Market’s obsession with quarterly results. Private companies can take bigger risks and follow longer term strategies which deliver more innovation

 

This article was written by Paul Sloane from Business2Community and was legally licensed through the NewsCred publisher network.