Author(s): Wesley M. Cohen and Steven Klepper
Source: The Review of Economics and Statistics, Vol. 78, No. 2 (May, 1996), pp. 232-243 Published by: The MIT Press
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FIRM SIZE AND THE NATURE OF INNOVATIONWITHININDUSTRIES:
THE CASE OF PROCESSAND PRODUCT R&D
Wesley M. Cohen and Steven Klepper*
Abstract-The effect of firm size on the allocation of R&D effort between process and productinnovationis examined. It is hypothesizedthat relative to productinnovations,process innovationsare less saleable in disembodiedform and spawn less growth. This implies that the returns to process R&D will depend more on the firm's output at the time it conducts its R&D than the t
returnsto productR&D. Incorporating his distinction in a simple model, we derive and test predictionsabout how the fractionof R&D devoted to process innovation varies with firm size within industries.
in determininghecomposition f R&Dthanonlyexogenous
The findings of Link (1982), Mansfield (1981) and
Scherer(1991) all suggestthatwithinindustries, irm size,
and,thus,acrossindustries, arket tructure, ayalso influence the compositionof R&D. Using data for 108 firms industrygroups,Mansfield
(1981) finds that within industries,the R&D dedicatedto
altogether ew products r processesincreasesless thanpron
OTAL R&D effort has long been viewed in both the portionally ith firm size. Scherer(1991) finds thatamong w
popularand academicliteratures s a key determinant manufacturingusinessunitsconsidered s a whole,process a
andindicator f the technological rogressiveness f firms, R&D increasesrelativeto productR&D as the size of the o
industries,and even nations.In recentyears,industrialists, firm increases,with each tenfold increasein businessunit a
policymakers nd academicshave increasingly ppreciated sales associatedwith a highly significantten pointincrease the importanceof the compositionof that effort as well. in the percentage f R&D expenditures evotedto process o
Americanfirms, for example,have been criticizedfor not innovation.' ink(1982) findsthatamongmoreR&DintenL o
devotinga greater hareof theirR&Dto the improvement f sive industries,he shareof R&Ddedicated o processinnot t
incremental vationincreaseswith marketconcentration. ll these findp manufacturingrocesses,for underemphasizing
development fforts,andfor focusingexcessively on short- ings are provocativebecause they suggest a link at the i
termR&Dprojects. apanese olicymakers,n contrast, ave industryevel betweenmarket tructure ndthe composition J
in the past expressedconcernthatJapanesemanufacturing of R&D effort, and, hence, the natureof innovation.It is T
firmswerenotconducting noughbasicresearch. hesecon- not clear,however,why firmsize or market tructurehould e
cerns all suggestthatthe compositionof R&D in manyna- affect the compositionof R&D. tional industries ay not be socially optimal.Before,howm...