Don't Get Any Big Ideas

Caution: Attempts to innovate can actually put you out of business. That's the conclusion of a study of more than 290,000 Australian businesses, 99% of which were small or midsized. The study found that filing for a patent was, on average, associated with a 4.2-year reduction in the life span of a business.

Problem is, it's not cheap to develop a new product or improve an existing technology. And the success rate for these sorts of innovations is low. "While spending to develop an innovation, a company may jeopardize its financial health, limiting its ability to access capital in the future and ultimately reducing its odds of survival," says Elizabeth Webster, who conducted the study with fellow University of Melbourne economists Hielke Buddelmeyer and Paul Jensen.

To gauge the effect of innovation on company longevity, the economists compared the number of applications for patents and trademarks with the number of business registration and de-registration filings to the government from 1997 to 2003. After accounting for economic conditions, interest rates, and characteristics of specific industries, patents were found to be associated with shorter business life spans, while trademark applications were associated with a 2.2-year average extension of a business' life. That's because trademarks typically go to products that have already been launched in other markets, or to products that are close to being released and less of a budget drain.

Some innovations are clearly worthwhile. Renewing a patent -- a sign of a successful product -- adds an average of 10 years to a business' life. And overall, the research found that economic conditions have the biggest impact on longevity. Making investments that weaken a company's balance sheet makes it more vulnerable to those conditions. Once again, it pays to keep an eye on the big picture.

By James Mehring

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