The effect of firm size on the allocation of R&D effort between process and product
innovation is examined. It is hypothesized that, relative to product innovations,
process innovations are less saleable in disembodied form 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 returns to product R&D. Incorporating this
distinction in a simple model, the authors derive and test predictions about how
the fraction of R&D devoted to process innovation varies with firm size within industries.