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The article discusses the meaning of research and development in the context of the relationship of the size of the firm as a factor in important new inventions or technological developments. Basic research is essentially a thinking process; this is true even when it is applied to activities involving very substantial processes, such as energy, communication, glass, food, chemicals, and so on. Determining what R&D means is complicated by the great diversity in the resources consumed and in the things produced by the many industrial firms and government agencies that carry on this work. It would be surprising if common accounting practices were followed to identify monies spent for such varied activities. An attempt is made to devise major classifications according to the activities involved and their measure of certainty. The customary categories--basic research, applied research, and development--are not adequate to support the distinctions that must be made. It is important to know, for example, whether an advance results in a new consumers' good, a producers' good, an improvement to a consumers' or producers' good, a new or improved production process, or an increment to the stock of knowledge that does not yet have a particular application.

Much has been written on the need for a more rapid rate of technical progress in the British economy but there is little in the way of hard facts on the characteristics of firms that innovate and those that do not, on the factors determining a firm's rate of innovation, and on the relationship between innovation and profitability. The present paper attempts to give some quantitative content to the discussion by examining the relationship between a firm's size, its profitability, its liquidity and the number of patents obtained in three United Kingdom industries -- Chemicals, an Electrical Engineering and Electronics grouping, and Machine Tools. These three industries were chosen because they are technologically based and so place heavy emphasis on research and development.
The plan of the paper is as follows. Section 1 discusses the patents data and the use of patents as an indicator of innovative activity. The size characteristics of patenting and non-patenting firms are considered in Section 2. Section 3 presents the model relating patenting to firm size, liquidity and profitability. Sections 4 to 6 report in turn the results for the Chemical industry, the Electrical Engineering and Electronics grouping, and the Machine Tools industry. Section 7 investigates whether any short-run profitability may be found to result from innovative activity. Section 8 compares our results with those obtained for the United States. Section 9 is a summary of our results. [ABSTRACT FROM AUTHOR]