Abstract
By deriving a formal model of industry R & D that identifies factors influencing industry R & D intensity, this paper first suggests firm density, defined as the inverse of average firm sales or simply the number of firms divided by industry sales, as a measure of market structure that is appropriate in explaining industry R & D intensity. The model shows that the cost structure of R & D, consumer preference over quality and price, the appropriability of R & D, firm density, and the average level of firm R & D intensity jointly determine industry R & D intensity. In particular, firm density has a positive relationship with industry R & D intensity, implying that firms in higher firm-density industries feel fiercer competitive pressure and thus engage more intensively in R & D. An empirical analysis of panel data on industry R & D activities of Korean manufacturing industries during the period 1991–1996 provides supportive evidence for the predictions of the model including the positive relationship between firm density and industry R & D intensity. The theoretical model and the empirical results are also consistent with the recent survey of U.S. corporate R & D activities by the U.S. Department of Commerce and the National Science Foundation (1999).
Similar content being viewed by others
References
Cabral, L. M. B. (2000) Introduction to Industrial Organization. MIT Press, pp. 243–244.
Cohen, W. M., and S. Klepper (1996) ‘A Reprise of Size and R&D’, Economic Journal, 106, 925–951.
Cohen, W. M., and R. C. Levin (1989) ‘Empirical Studies of Innovation and Market Structure’, in R. Schmalensee, and R. D. Willig, eds., Handbook of Industrial Organization, Vol. II. Elsevier, pp. 1059–1107.
Cohen, W. M., and D. A. Levinthal (1989) ‘Innovation and Learning: The Two Faces of R&D’, Economic Journal, 99, 569–596.
Dasgupta, P., and J. E. Stiglitz (1980) ‘Industrial Structure and the Nature of Innovative Activity’, Economic Journal, 90, 266–293.
Dorfman, R., and P. O. Steiner (1954) ‘Optimal Advertising and Optimal Quality’, American Economic Review, 44, 826–836.
Dosi, G. (1988) ‘Sources, Procedures, and Microeconomic Effects of Innovation’, Journal of Economic Literature, 36, 1120–1171.
Futia, C. (1980) ‘Schumpeterian Competition’, Quarterly Journal of Economics, 94, 675–695.
Geroski, P. A., and M. Mazzucato (2001) ‘Modelling the Dynamics of Industry Populations’, International Journal of Industrial Organization, 19, 1003–1022.
Greer, D. F. (1992), Industrial Organization and Public Policy. 3rd edn. Macmillan Publishing Company, pp. 677–687.
Jaffe, A. B. (1986) ‘Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value’, American Economic Review, 76, 984–1001.
Kamien, M. I., and N. L. Schwartz (1975) ‘Market Structure and Innovation: A Survey’, Journal of Economic Literature, 13, 1–37.
Kamien, M. I., and N. L. Schwartz (1982) Market Structure and Innovation. Cambridge University Press.
Klevorick, A. K., R. C. Levin, R. R. Nelson, and S. G. Winter (1995) ‘On the Sources and Significance of Interindustry Differences in Technological Opportunities’, Research Policy, 24, 185–205.
Lee, Chang-Yang (1999) ‘A Theory of the Determinants of R&D’. Doctoral Dissertation, Harvard University.
Lee, Chang-Yang (2002) ‘A Simple Model of R&D: An Extension of the Dorfman–Steiner Theorem’, Applied Economics Letters, 9, 449–452.
Lee, T., and L. L. Wilde (1980) ‘Market Structure and Innovation: A Reformulation’, Quarterly Journal of Economics, 94, 429–436.
Levin, R. C., and P. C. Reiss (1984) ‘Tests of Schumpeterian Model of R&D and Market Structure’, in Griliches, Z., ed., R&D, Patents, and Productivity. University of Chicago Press, pp. 175–204.
Levin, R. C., W. M. Cohen, and D. C. Mowery (1985) ‘R&D Appropriability, Opportunity, and Market Structure: New Evidence on Some Schumpeterian Hypotheses’, American Economic Review, 75, 20–24.
Levin, R. C., A. K. Klevorick, R. R. Nelson, and S. G. Winter (1987) ‘Appropriating the Returns from Industrial Research and Development’, Brookings Papers on Economic Activity, 3, 783–820.
Loury, G. C. (1979) ‘Market Structure and Innovation’, Quarterly Journal of Economics, 93, 395–410.
Mazzucato, M. (2000) Firm Size, Innovation, and Market Structure: The Evolution of Industry Concentration and Instability. Edward Elgar.
Phillips, A. (1966) ‘Patents, Potential Competition, and Technical Progress’, American Economic Review, 56, 301–310.
Reinganum, J. (1982) ‘Dynamic Games of Innovation’, Journal of Economic Theory, 25, 21–41.
Scherer, F. M. (1965) ‘Firm Size, Market Structure, Opportunity, and the Output of Patented Inventions’, American Economic Review, 55, 1097–1125.
Scherer, F. M. (1967) ‘Market Structure and the Employment of Scientists and Engineers’, American Economic Review, 57, 524–531.
Scherer, F. M. (1984) ‘Using Linked Patent and R&D Data to Measure Technology Flows’, in Griliches, Z., ed., R&D, Patents, and Productivity. University of Chicago Press, pp. 417–464.
Scherer, F. M., and D. Ross (1990) Industrial Market Structure and Economic Performance. 3rd edn. Houghton Mifflin, pp. 645–651.
Scott, J. T. (1984) ‘Firm versus Industry Variability in R&D Intensity’, in Griliches, Z., ed., R&D, Patents, and Productivity. University of Chicago Press, pp. 233–248.
Spence, M. (1984) ‘Cost Reduction, Competition, and Industry Performance’, Econometrica, 52, 101–121.
Stata Corporation (2001) Stata 7 Reference Su-Z, Vol. 4. Stata Press.
Symeonidis, G. (1996) ‘Innovation, Firm Size, and Market Structure: Schumpeterian Hypotheses and Some New Themes’, OECD Economics Department Working Paper No. 161.
Tandon, P. (1984) ‘Rivalry and the Excessive Allocation of Resources to Innovation’, Bell Journal of Economics, 14, 152–165.
U.S. Department of Commerce and National Science Foundation (1999) U.S. Corporate R&D, Vol. I, pp. 12–13. Available from the NSF's website (www.nsf.gov/sbe/srs/nsf00301).
Van Cayseele, P. (1998) ‘Market Structure and Innovation: A Survey of the Last Twenty Years’, De Economist, 146, 391–417.
Waterson, M. (1984) Economic Theory of the Industry. Cambridge University Press.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Lee, CY. Firm Density and Industry R & D Intensity: Theory and Evidence. Review of Industrial Organization 22, 139–158 (2003). https://doi.org/10.1023/A:1022965830769
Issue Date:
DOI: https://doi.org/10.1023/A:1022965830769