FIRM SIZE AND THE NATURE OF INNOVATION WITHIN INDUSTRIES - THE CASE OF PROCESS AND PRODUCT R-AND-D

The effect of firm size on the allocation of R&D effort between proces s and product innovation is examined. It is hypothesized that relative to product innovations, process innovations are less saleable in dise mbodied form and spawn less growth. This implies that the returns to p rocess R&D will depend more on the firm's output at the time it conduc ts its R&D than the returns to product R&D. Incorporating this distinc tion in a simple model, we derive and test predictions about how the f raction of R&D devoted to process innovation varies with firm size wit hin industries.