Abstract
Firms are able to enhance their added value of products and improve their competitiveness in the product markets through investing in R&D. However, R&D investments incur more complicated process of production and thus higher production costs. This paper studies whether quality-based firms become more competitive when they invest in R&D than cost-based firms. Furthermore, we discuss that R&D investments can increase firms’ revenue when they invest in their core competence. Firms are categorized into two groups, quality-based firms and cost-based firms, according to their markup levels in their main product markets. We find that quality-based firms are more competitive in the markets when they invest in R&D. In contrast, cost-based firms are likely to cut down their production costs and enjoy the benefits of economies of scale in order to increase their revenue. Moreover, our study also finds that R&D investments have positive effect on firms’ revenue for both types of firms.