Uncovering the role of product innovation in the relation between firm size and growth

Robust evidence of a negative relation between firm size and growth motivates widespread policy support to small firms. However, the determinants of such dependence are poorly understood. We investigate the role of product innovation as possible driving factor, using sales data for all firms in the pharmaceutical industry. We find that the small firm-growth premium arises only for firms switching products in their portfolio, and that such premium is driven by product innovation, either new-to-world, which leads to larger impact of new products, or new-to-firm, which mitigates cannibalization. We urge policy makers to prioritize innovation policies in supporting small firms.