Relation of Firm Size to R&D Productivity

Many studies have shown that small firms generate more patents per R&D dollar than large firms. Does this mean that small firms are more efficient innovators than large firms? In this paper we exploit a unique data set to reexamine the firm size-innovation relationship. Because firm-reported R&D expenditures may be a biased measure of R&D activities due to under-reporting by small firms, we use the number of inventors in the firm's employ as a measure of R&D inputs. We focus on the pharmaceutical and semiconductor industries, two industries that are prolific generators of homogenous innovations. As has been found elsewhere in the literature, we find that patents per R&D dollar decline with firm size for both industries. This contrasts with the relationship between patents per inventor and firm size. The average number of patents per inventor increases with size in the semiconductor industry. In the pharmaceutical industry, we show no relationship between the number of patents produced per inventor and firm size.