A Model of Both Large and Small Scale Innovation

Economies of scale theories suggest that large firms should undertake, over time, an increasing proportion of research and development (R&D) and by extension patents. However, there has been no increase as predicted, and in some countries small and medium enterprises have actually increased their share of patenting activity. In this paper I present a model that provides a theoretical basis for the existence of both large firms and fringe entrepreneurs, leading small firms, in the same competitive R&D industry that produces patents. In a world with decreasing information costs I show that the size of larger research units decreases while the number of research units in the industry increases. I also show the condition whereby the total number of ideas pursued by firms in the industry increases as information costs decrease. Finally, the model shows that as the price of information decreases there is an increase in the number of entrepreneurs leaving firms to implement ideas