Review of Industrial Organization 21: 419–436, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Technological Opportunity and Economies of Scale
in Research Productivity: A Study on Three Global
MICHAEL K. FUNG
Department of Business Studies, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong
Abstract. In this study, the author tests for economies of scale with the use of patent citations and
assesses the impacts of technological opportunity on research productivity in three global industries,
namely, computer, chemical, and electrical and electronic. Technological opportunity in an industry
is jointly represented by knowledge spillovers, inter-ﬁrm research overlap and scope of research. In
particular, the effect of knowledge spillovers is decomposed into internal, intra-industry and inter-
industry spillovers. The results suggest no evidence for economies of scale, but the impacts of various
aspects of technological opportunity on research productivity are signiﬁcantly positive. Moreover,
the data indicate that if the number of ﬁrms in each overlapping research area is small, a rise in the
number of these areas enhances research productivity.
Key words: Innovation, patent, research productivity, technology.
JEL Classiﬁcations: O310, O330, L100.
An array of studies has been conducted in past literature to examine the relationship
between ﬁrm size and innovative performance. Cost advantages of large ﬁrms over
small ﬁrms in conducting research activities are attributable to economies of scale
and scope. This view is widely supported analytically by earlier studies, such as
Schumpeter (1950), Panzar and Willig (1981) and Cohen and Levin (1989). Nev-
ertheless, previous attempts to test for the existence of size advantage in R&D,
such as Bound et al. (1984), Hall et al. (1986), Baldwin and Scott (1987) and
Cohen and Levin (1989), yield inconclusive results. Griliches (1990) has conducted
a comprehensive survey on those studies. As indicated in more recent studies,
for example, Jaffe (1988), Griliches (1990), Malerba and Orsenigo (1995), and
Henderson and Cockburn (1996), analyses of research performance are incomplete
without considering the technological opportunity that characterizes an industry.