Multiplant Firms and Innovation Adoption and Diffusion

1. IntroductionOne empirical regularity associated with the adoption of new technology is that large firms tend to adopt sooner than small firms (e.g., see Davies 1979; Mansfield 1968; Mansfield et al. 1982; Stoneman 1983, 1995; or Hoppe 2002). The usual explanation, of course, is that large firms expect a greater return from adoption than small firms. However, large firms do not always adopt first, as can be seen from the diffusion of several new processes in the U.S. steel industry: the basic oxygen furnace and continuous casting (Adams and Mueller 1982) and thin-slab casting (Ghemawat 1993, 1995). This article develops a new theoretical model of innovation adoption and diffusion that explains why large firms tend to adopt first but admits conditions under which small firms adopt first.The analysis focuses on the adoption of an innovation of uncertain profitability when a firm's size is measured by the number of plants it operates. As is well known, one reason for operating multiple plants is production costs that are increasing at the margin. Another reason is the existence of economies of multiplant operations, cost savings that result solely from the operation of multiple plants. Theoretical and empirical support for these economies is mixed. Theoretically, the operation of multiple plants can allow savings in nonproduction costs, such as transportation, distribution, and inventory. It can also allow economies of massed reserves, cost savings associated with retaining proportionately fewer spare parts, backup machines, and repair persons in reserve. Information sharing between plants can reduce production and adoption costs. However, multiplant operation can also result in greater information costs. Van Zandt and Radner (2001) show that, because information processing takes time, computational constraints limit the amount of information that can be used in reaching a decision. This informational crowding-out effect can result in decreasing returns to size, or diseconomies of multiplant operation.In a seminal, wide-ranging study, Scherer et al. (1975) find little empirical evidence in support of multiplant economies. Moreover, when these economies do exist, they involve savings in nonproduction costs. More recently, in their comparative study of the performance of light water nuclear reactor power plants in the United States and France, Lester and McCabe (1993) do find empirical support for production cost savings due to information sharing about learning-by-doing between plants. In his study of the adoption of thin-slab casting in the steel industry, Ghemawat (1995, 1997) finds that Nucor achieved cost savings due to information sharing between plants regarding both construction and production costs. However, he attributes these multiplant economies to specific aspects of Nucor's organizational structure, and observes that other steel firms with different organizational structures did not achieve these same cost savings.Given these conflicting results, the analysis in this article assumes that, if there are multiplant economies, they take the form of savings in nonproduction costs. In this case, a large firm need not have a greater incentive to adopt first. Its increase in profit from the adoption of a success in all its plants is certainly greater. However, the existence of nonproduction cost economies can reduce the incentive of a large firm to adopt first. Suppose there are two firms, a large firm with two plants and a small firm with one plant. Also suppose that, when the innovation is first installed in a plant, the adopter must shut down that plant for a finite amount of time in order to learn if the innovation is a success or not. This shut-down time can be considered as an experimental period during which the firm trains workers, produces and tests prototypes, attempts to overcome any problems associated with the use of the new technology, or makes any necessary changes in its existing organization. …