Firm density and industry R&D intensity: Theory and evidence

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).