Review of Industrial Organization 22: 139–158, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Firm Density and Industry R&D Intensity: Theory
Graduate School of Management, KAIST (Korea Advanced Institute of Science and Technology),
207-43 Cheongryangri, Dongdaemun, Seoul, 130-868, Korea
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).
Key words: Firm density, market structure, R&D appropriability, technological opportunity.
JEL Classiﬁcation: O3, L1.
The relationship between market structure and industry R&D performance has
been studied both intensively and extensively (e.g., Scherer and Ross, 1990;
Kamien and Schwarz, 1975, 1982; Cohen and Levin, 1989; Greer, 1992; Sy-
meonidis, 1996; Van Cayseele, 1998). Seller concentration or the Herﬁndahl-
Hirschman Index have been frequently used as a measure of market structure and
the conventional wisdom postulates an inverted U-shaped relationship between
market structure, usually represented by a concentration ratio on the horizontal
axis, and industry R&D intensity (i.e., R&D-to-sales ratio) on the vertical axis.
This paper is based on part of the author’s Ph. D. dissertation “A Theory of the Determinants
of R&D” (Harvard University, 1999). I thank my dissertation advisor Frederic M. Scherer for his
invaluable comments. I also would like to thank General Editor John Kwoka and an anonymous
referee for their helpful comments on the early version of this paper.