Is firm size conducive to R&D choice? A strategic analysis of product and process innovations

Using a duopoly model of multiproduct firms, we show that different innovation incentives cause the larger firm to invest more in process (cost-reducing) innovations and the small one to allocate more resources to search for new products. Because of this heterogeneity of R&D behavior, the large firm remains dominant for the original product in the post-innovation market, but the small firm is more likely to be a leader in the new product market. These theoretical results are consistent with recent empirical findings.