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Abstract
Previous literature in endogenous growth has been ignoring the fact that firms consider the interac- tion between its products through a portfolio approach while making decisions in innovation. In my model, a firm chooses optimal R&D expenses for radical and incremental innovations in each product line it has. From the portfolio perspective, ”volatility effects” and ”internal conflict” are introduced. Introduction of the first channel is adding anther benefit(besides direct profits) of radical innovation, but this marginal benefit is decreasing with firm size, while introduction of the second channel is adding another cost of radical innovation(besides the cost of research) and this marginal cost is increasing with firm size. The two channels discourage large firms from doing radical innovation. I constructed a framework where firms trade off two channels between increasing marginal success rate of radical innovation while choosing optimal share of radical innovation, which throw light on the phenomenan that large firms do less radical innovation. My simulation results show that volatility effects and internal conflict play a role in motivating small firms do more radical innovation while large firms do less.