Process innovation, product innovation and firm size

An innovative firm allocates its research and development (R&D) investments between product and process innovations. This paper extends the literature analyzing the determinants of a firm's decision to allocate R&D between process and product innovation by connecting to the literature of incumbent's innovation and makes predictions about the relationship between firm size and innovation choices and outcomes.;Larger firms benefit more from process innovation than smaller firms because of the scale of their operations, while consumers' decision to switch among a firm's products may reduce the size of the scale advantage.;We demonstrate that larger firms undertaking both types of innovations are still inclined to process innovation, resulting in a smaller percentage of sales from new or markedly improved products (new product sales ratio). However, being larger increases the probability of product invention due to the existence of a threshold size for a firm to invest in product R&D. Empirical findings confirm the prediction that the overall relationship between new product sales ratio and firm size tends is nonlinear and largest firms are actually most intensive in new product sales.