R&D, firm size and incremental product innovation

Abstract

This article addresses an issue that is debated in the economics of innovation literature, namely the existence of increasing returns to R&D expenditures and firm size, in product innovation. It explores further how the firm's structural characteristics and contextual factors affect the sustained introduction of new components over a relatively long time period. Taking advantage of an original and unique database comprising information on new product announcements by leading semiconductor producers, we show that: (i) decreasing returns to size and R&D expenditures characterize the innovation production function of the sampled firms; (ii) producers operating a larger product portfolio exhibit a higher propensity to introduce new products than their specialized competitors; (iii) aging has positive bearings on the firm's ability to innovate.

Keywords:

• R&D
• firm size
• product innovation
• semiconductor industry

JEL Classification :

• L11
• L63
• O31
• O32

Acknowledgements

We gratefully acknowledge two anonymous referees for their useful comments and suggestions. The usual disclaimer applies.

Notes

This is the dominant logic according to the Schumpeterian Mark II model of innovation, a scenario ‘characterized by relevant barriers to entry for new innovators, the prevalence of large established firms in innovative activities and the dominance of a few firms which are continuously innovative through the accumulation over time of technological capabilities’ (Malerba and Orsenigo 1996, 60).

We discuss those arguments supporting the Schumpeterian perspective that have been advanced in the economics literature. See Damanpour (1992) for a complementary discussion based on the organizational theory literature. Moreover, in line with Nelson and Winter's (1982) interpretation of Schumpeter's work and the scarce support from existing empirical evidence (Cohen 1995), we disregard the effect of ex-ante market structure on innovative behavior and concentrate on the relationship between firm size and innovation.

The availability of reliable data on the output side of the innovation process is also a major concern for policy-makers interested in the sources of innovativeness, the incentives to promote it, and the ultimate impact of technological change over social welfare.

The literature dealing with innovation indicators distinguishes between two basic types of approaches: (i) a ‘subject’ approach which focusses on the innovating agent and relies upon firm surveys to gather data on firm-level innovation activity; (ii) an ‘object’ approach which focusses on the objective output of the innovation process and identifies technological innovation through expert appraisal or new product announcements (Archibugi and Pianta 1996; Smith 2005).

Notwithstanding the limited attention thus far, the topic is important insofar as it is neatly associated with the theme of whether aging has positive or negative effects on organizational functioning, a prominent issue in organizational ecology studies (Sorensen and Stuart 2000).

Products for which semiconductor producers do not generally issue press releases, and technical journals do not feature are: (i) existing product in new packaging; (ii) existing products incorporating incremental changes in various features.

Data on R&D spending and employment are from Compustat and the Strategic Reviews databases.

When compared with earlier research (see Table 1 in Guo and Trivedi 2002), the excess zero problem is not a concern in our case. In fact, the percentage of 0 innovations in our sample is 3.4%.

Estimates for the pooled Poisson specification are available from the authors on request.