Innovation and Small Business Performance: 

Examining the Relationship Between Technological Innovation 

and the Within-Industry Distributions of Fast Growth Firms

By Jonathan T. Eckhardt and Scott Shane, Peregrine Analytics, LLC, Madison, Wisconsin

under contract no. SBAHQ-04-M-0534 2006. [40] pages. 

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information and 

analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not necessarily reflect the views of the Office of Advocacy.

Purpose

Theory holds that industry conditions favorable to 

the performance of small private firms are fundamentally different from industry conditions favorable to the performance of large, established firms. 

However, research into this question has been hindered by data limitations. This report seeks to determine empirically, via examination of a unique dataset, how changes in conditions of some industries, 

e.g., technological intensity and production and sales 

intensity, impact the performance of small fast growing small firms and fast growing large public firms in 

those industries.

Overall Findings

Industries that are more technically oriented (as evidenced by increased employment of scientists and 

engineers) are more accommodating to small fast 

growing private firms. As industries become more 

production oriented, they become more accommodating to large fast growing public firms. 

Highlights

• Distribution of large high growth established 

firms and small high growth private firms is not even 

across industries. Forty percent of the large firms 

are concentrated in ten industries; 54 percent of the 

small firms are also found in just ten industries.

• Small and large high growth firms were concentrated in differing industries. Of the top ten small 

and large high growth industries, only computer programming and data processing, as well as computer 

and office equipment were on both lists.

• Of the 283 industries studied, 192 had at least 

one private high growth firm and 154 had at least 

one public high growth firm.

• By major industry, about 60 percent of high 

growth small private firms were in services versus 

about 28 percent for large public firms. Manufacturing had the highest number of large public high 

growth companies. From 1984 to 1997, the share of 

high growth small private firms in services surged, 

while the percent of high growth large public firms 

in the services sector declined.

• The econometric models found that changes in 

the technical intensity of an industry are positively 

linked to the number of high growth small private 

firms, and change in production intensity is negatively linked. The results were reversed for high growth 

large public firms.

• A relationship between an industry’s mix of 

sales and distribution employees and the number of 

high growth private firms was not found.

• The results of the paper support the notion that as 

an industry evolves over time, opportunities for new 

entrepreneurs will change based on how the industry 

evolves. They also support the notion that small private and large public firms perform different roles in 

different industries, and in the economy as a whole.

Scope and Methodology

Following the number of high growth companies 

by industry from 1984 to 1997, regression models 

for small private and large public firms were created. The lagged percentage of technical, sales and 

distribution, and production workers in an industry 

were independent variables. Model controls included 

patent counts, establishment counts, and large establishment counts to account for variations among 

the industries (as a further check, an industry’s total 

sales were also included). 

Data from various sources were used. Inc. 

magazine’s “Inc. 500” were used as a data set for 

high growth small private firms. The Inc. 500 is a 

group of high sales growth firms at least 5 years 

March 2006 No. 272
old with sales between $100,000 and $25 million. 

(Because of the limited availability of information 

on private firms, industry counts were used in the 

models.) Using Standard and Poor’s COMPUSTAT 

database and the Inc. 500 methodology for picking 

high growth companies, the 500 high growth public 

firms were selected and judged to be large firms. 

Employment levels were created from occupation 

data in the U.S. Census Bureau’s Current Population 

Survey. Industries were coded using the U.S. government’s three-digit Standard Industrial Classification 

(SIC) system.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703)605-6000

TDD: (703) 487-4639

www. ntis.gov

Order number: PB2006-10245

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