Abstract

This paper examines how incremental changes affect structural properties of the industry, and therefore, the competitive dynamics. Specifically we analyze the relationship between innovation, firm size and growth in capital intensive industries. In this context innovation is mainly based on processes, in the form of incremental changes. We argue that, in a stationary stage, firm growth is directly proportional to firm size, so larger firms take advantage of the isolating mechanisms in place. However, in the presence of incremental changes firm growth is indirectly proportional to firm size, since smaller firms pose higher strategic flexibility and are able to adopt innovations faster. Our findings confirm the dependency of growth rate on firm size, rejecting Gibrat’s Law of Proportionate Effect