R&D, firm size and innovation outputs: Are Japanese firms efficient in product development?

Although Japanese firms in various industries enjoyed outstanding success during the 1980s, the recent economic news has been less favorable. Like their American counterparts, Japanese managers have faced difficult decisions regarding plant closures, layoffs, and moving production facilities overseas. Many Japanese business leaders attribute the innovation successes of the 1980s, at least in part, to economies of scale resulting from increases infirm size. If this assertion holds true, the current economic climate in Japan seems certain to result in diminished economies of scale for innovative activities. Ryuhei Wakasugi and Fumihiko Koyata test this assertion in a statistical study of the innovation efficiency of Japanese electrical machinery firms. In other words, their study explores whether the hypothesized economies of scale apply to the innovation inputs and outputs of these firms. They examine the manner in which R&D expenditures, patent applications, and product developments relate to the size of Japanese electrical machinery firms during the late 1980s and early 1990s—a period marked by high levels of innovative activity among these firms. For the Japanese electrical firms in this study, innovation inputs that is, R&D expenditures—increase in greater proportion than firm size. In other words, the larger firms in this study pursued their innovation efforts more aggressively than did the smaller firms in the study. In terms of R&D expenditures, however, the study does not reveal any resulting economies of scale for either patent applications or product developments. Similarly, analysis of the data in this study does not identify any economics of scale for product developments as a result of increases in firm size. In fact, the only economies of scale identified in the study involve firm size and the number of patent applications. In general terms, the statistical evidence in this study does not support the hypothesis that an increase in firm size improves the efficiency of innovation activity. To put this another way, the study does not provide evidence to support the hypothesis of economies of scale in product development.