The centrifugal effects of digital technologies on knowledge generation: Internet penetration and small firms’ innovation

The paper explores the centrifugal effects of digital technologies on the generation of technological knowledge. Access and use of knowledge sources external to each research unit is indispensable for the recombinant generation of new technological knowledge. Before the introduction of digital technologies, the costs of accessing and using external knowledge exhibited strong economies of size, thereby favouring large relative to small firms. The diffusion of digital technologies has sharply reduced these costs and eroded the size advantage. Digital technologies therefore reshape the organization of knowledge generation, raising the contribution of small firms to the production of new technological knowledge. We proxy access to digital technologies with the diffusion of Internet connections across US areas. Exploiting variation at the applicant size-Commuting Zone level over the period 2009-2019, we show that higher Internet penetration disproportionately increases patenting by small firms relative to large firms. These findings are robust to instrumental variable estimation. The analysis of the centrifugal effects of digital technologies offers a new perspective on the Schumpeterian hypothesis.