Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D
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...
shipbetweenfirmsize andinnovation, hatof Jewkes,SawPrincetonUniversity Press, 1962).
ers and Stillerman(JSS) (1958). In a view subsequently Baldwin, William L., and John T. Scott, MarketStructureand Technological
echoed by Nelson, Peck and Kalachek (1967), Scherer Cohen,Change (M., and arwoodKcademic Publishers, 1987).
and Diversity in the Pursuitof TechnologicalProgress,"SmallBusiness
Economics 4 (1992a), 1-14.
, "A Reprise of Size and R&D," Economic Journal (1996, forthcoming).
of whatconditions hedivisionof "innovative abor"across Dosi, Giovanni, "Technological Paradigmsand Technological Trajectories,"
Research Policy 11 (1982), 147-162.
determinationf the mix of innovativeactivitiesacrossall Freeman,Christopher,The Economicsof IndustrialInnovation,2nd ed. (Cambridge, MA: MIT Press, 1982).
provide a startingpoint-distinct from that of JSS-for
19Extendingthis theme further,we have arguedelsewhere (Cohen and Klepper (1992b, 1996)) thatfor similarreasons it is also perilousto make inferences
In related work (Cohen and Klepper (1992b)), we suggest that there are
exogenously determinedR&D-relatedcapabilitiesthat differ across firms and
23 Klepper (1996) builds on and extends these ideas in a dynamic model
Journal of Political Economy 93 (1985), 837-858.
Jewkes, John,David Sawers, and RichardStillerman,The Sources of Invention
Innovationand MarketFailure," American Economic Review (1996).
Paper-son Economic Activity (1987), 783-820.
ProcessInnovation,"in DevendraSahal(ed.), TheTransferand Utilization of TechnicalKnowledge(Lexington,MA: LexingtonBooks, 1982).
Mansfield,Edwin, "Composition of R&D Expenditures:Relationshipto Size
of Firm,Concentration, ndInnovativeOutput,"this REVIEW63 (1981),
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