The moment
Noam Bardin,
former chief executive of navigation app Waze, knew that life at a big company would be profoundly different from running a startup came soon after he sold his company to Google.
“The first few weeks after the acquisition, we began dealing with the bewildering corporate bureaucracy,” says Mr. Bardin. “What seems natural at a corporation—multiple approvers and meetings for each decision—is completely alien in the startup environment: make quick decisions, change them quickly if you are wrong.”
Mr. Bardin managed to last for seven more years at Google before leaving in 2021. (He has since founded another startup, the Twitter-like news app Post.news). What he learned along the way tracks with what researchers who study business have found: that big companies of every sort tend to give their employees incentives to be cautious rather than bold, to pursue overly complicated solutions rather than simple ones, and to seek promotions over serving the customer.
Google didn’t respond to requests for comment.
Difference in an inventor’s outcome between inventors hired by incumbent or young firms
Years before and after hire
Years before and after hire
Fresh evidence from a massive new study bolsters the narrative that some version of what happened to Mr. Bardin is happening to many of America’s most sought-after and skilled workers. Economists say it’s part of a broader, worrisome story about the pace of innovation that in the past has kept the fires of America’s economic engine burning.
The findings, published this past week in a paper from researchers at the University of Chicago and the U.S. Census Bureau, show that when inventors join large firms, they get a pay bump, but they also produce fewer new innovations, relative to inventors hired by young firms. The research is based on a gigantic data set, including 760,000 U.S. inventors and their patent-filing histories.
This research and related studies bear on everything from the slowing pace of productivity growth in the U.S. to why it is that a startup that currently has fewer than 400 employees, OpenAI, was able to release a useful artificial-intelligence chatbot before any of the tech behemoths that have many multiples of that number of people working on AI.
Tech isn’t the only sector in which big companies are accruing growing concentrations of economic value and activity, and attracting more inventors and the intellectual property they create.
“Some of these broader changes are affecting finance, retail, waste management, pharmacy-benefit management—it’s not every industry, but it’s a majority,” says
James Bessen,
an economist at Boston University who has written a book on the subject.
Golden handcuffs, walled gardens
Mr. Bardin joined Waze in 2009, not long after it was founded in Israel, moved to the Bay Area, and guided the rapid expansion and innovation that made Waze a competitor to Google Maps. Google bought it in 2013 for about $1 billion. Mr. Bardin stayed on as the head of Waze, and became a vice president at Google.
One of Mr. Bardin’s early observations about life at a big tech company was that the incentives were different from those at a startup.
Noam Bardin, then CEO of Waze, in 2019.
Photo:
Adam Schultz for The Wall Street Journal
Before the sale, everyone’s financial interest was aligned with the performance of the company’s products. Once Waze was a subsidiary, getting ahead was all about getting promoted. This was the shortest route to personal enrichment, since it determined one’s salary and stock grants, says Mr. Bardin.
Authors of the new study found similar issues for inventors who joined big firms. After being hired by a big company, inventors produced 6% to 11% fewer innovations, as measured by their output of patents.
At the same time, these inventors earned on average 12.6% more than those who were hired by smaller, newer companies. Given that companies like Google parent
Alphabet
GOOG 3.76%
or
parent Meta Platforms were, until recently, legendary for having some of the most employee-friendly cultures on the planet, it’s easy to see why talented people would trade the stress and risk of life at a startup for a gig at a big company.
There is at least one alternative explanation that could account for some of these effects, says
Paul Hünermund,
an assistant professor at Copenhagen Business School who is not affiliated with this research. The kind of inventors who aspire to managerial roles at a big company, and the kind who want to remain at a small one, could be sorting themselves into each type of firm. Even so, he adds, the new study’s authors “have a compelling theoretical story, great data and descriptive evidence.”
From ‘killer acquisitions’ to killer hiring
This wooing of inventors by big firms has a number of effects that are likely to be bad for innovation overall, says
Ufuk Akcigit,
economics professor at the University of Chicago and co-author of this latest study.
One such effect is that inventors have become less likely to become entrepreneurs in recent decades, and more likely to work for large companies, something the researchers were able to determine by examining census data. The proportion employed by the biggest companies grew to around 58% by the end of the 2010s from less than 50% in the year 2000.
“‘The people who stay at a big company have to play the same games as everyone else…. Their political side is what gets them promoted.’”
At big companies, people generate new ideas and get them in front of customers more slowly because of misaligned incentives, bureaucracy and institutional risk aversion, says Mr. Bardin. “The people who stay at a big company have to play the same games as everyone else, which means their innovative side doesn’t help them,” he adds. “Their political side is what gets them promoted.”
People at big companies tend to have plenty of good ideas, he adds. The difficulty is with bringing them to fruition.
“One typical problem with large corporations is there is a disconnect between R&D and the production division,” says Dr. Akcigit. “When you are small, you know what’s happening in the firm, so you put together some new tech or product, and it sees the sunlight relatively quickly.”
Similar effects have been observed at the level of companies, rather than individuals. In a 2021 paper called “Killer Acquisitions,”
Colleen Cunningham,
an economist at the University of Utah, and her colleagues found that companies sometimes buy a startup not to incorporate its technology but to neutralize a potentially disruptive competitor.
The phrase “killer acquisitions” has since become part of the lexicon of antitrust enforcers, especially in tech. Regulators now regularly raise the specter of these kinds of mergers when arguing for more aggressive action against them, which the Federal Trade Commission has pursued under President Biden.
“Research and history show that innovation is one key benefit arising from fair competition,” Federal Trade Commission chair
Lina Khan
said in an emailed response to questions. “If one or a small handful of companies dominate a sector, they often don’t feel much pressure to deliver breakthrough innovations.”
Big companies aren’t deliberately trying to make America’s innovators less likely to spawn the next great thing, says Mr. Bessen, but this has been one effect of their tendency to over-hire and hoard talent.
Not everyone agrees that this concentration of power and innovators in the hands of big companies is bad for competition or America’s economy. For one thing, it doesn’t seem to be hurting the formation of the kinds of startups that matter most to America’s ability to innovate, says
Robert Atkinson,
founder of the Information Technology and Innovation Foundation, a Washington, D.C.-based think tank backed by big tech companies.
A 2020 analysis by Mr. Atkinson and a colleague found that America is still creating high-growth, high-tech startups, and that the more concentrated an industry is, the more of these kinds of startups are born in it. As for innovators producing fewer patents when they join a big firm, he says this is probably not representative of their actual productivity.
Big firms are able to use any given innovation in more areas of their sprawling businesses, which means that they get much more out of every dollar they spend on research and development, he adds.
What’s bad for the innovation goose is bad for the competition gander
The innovations of workers hired by big companies also are more likely to be geared to preserving the size and market dominance of those companies, rather than creating truly new products and services, says Mr. Bessen.
Think of a big tech company rolling out yet another me-too copy of its competitors’ product. Does the world really need yet another streaming service or calendar app, for example?
Startups aren’t dead, and big firms have their place
Of course, innovative new startups can still come along and disrupt incumbents. OpenAI, the startup behind ChatGPT, is an example—but also illustrates why truly disruptive startups like it may be increasingly scarce.
What’s hopeful for American innovation is that it was able to release ChatGPT, a product based on technology pioneered by Google, before Google did, says Mr. Bessen. For years, the much bigger and better-resourced firm kept its own version of ChatGPT behind closed doors, in part because of the risk to its reputation of releasing an AI chatbot that by its very nature can be erratic and just plain wrong.
Google CEO
Sundar Pichai
recently told one of my colleagues that the company will—at last—incorporate AI-based chat into the company’s search engine.
Google is full of smart, well-meaning people, says Mr. Bardin. And big companies are at their best when they recognize their strengths, and pursue them with a single-minded focus, he adds.
Innovation may not be what big companies are best at, but no other kind of organization can operate at their scale. Apple, for example, is great at hardware and logistics, which is why it continues to gain smartphone and PC market share with its iPhone, Mac, and the accessories that make them more useful. Google is still great at search and ads, and was able to use its enormous cash flow to subsidize YouTube and build its mapping products—both of which started as acquisitions—says Mr. Bardin.
Microsoft,
in returning to its roots as an enterprise software company, has thrived under CEO
Satya Nadella.
But what’s worrisome about OpenAI is that many of the same forces that allow big companies to be so dominant may be contributing to its need to partner early in its life with a company like Microsoft, says Mr. Bessen. (OpenAI’s technology was recently incorporated into a number of Microsoft products, after a multibillion-dollar investment from the company.)
As technology becomes more complicated, and companies hold on to it more tightly, it takes much longer to spread to other companies than it did before, he adds.
Reining in the growing power and advantages of big companies will be difficult, says Dr. Akcigit. For example, it may require updating tax laws that offer advantages to big companies but don’t help small ones nearly as much, such as the R&D tax credit, which can require the kind of complicated documentation and accounting that only large companies are equipped to carry out. It may also require that competition authorities like the FTC be more forward-looking, to cope with the way that tech companies can grow quickly.
The total number of inventors in the U.S., and the total amount of money invested in R&D in the U.S., continue to grow. Yet business dynamism—the rate at which new firms arise, grow, and fail—is down, according to a large body of research, and economic growth is slowing, says Dr. Akcigit.
“The idea that if you allocate more resources to R&D, you’ll grow faster,” he adds, “that’s now broken in the U.S.”
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Write to Christopher Mims at christopher.mims@wsj.com
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