THERE exists a vast empirical literature examining the relationship between the intensity of research and development activity (R & D) and the size of the firm. This paper attempts to establish a theoretical foundation for that literature, a task begun by Fisher and Temin (F & T) [2], [3]. We demonstrate that the elasticities of both R & D input and R & D output with respect to firm size bear a simple relation to three other elasticities - one reflecting the industry's potential returns to R & D, the other two the degree to which the industry is "Schumpeterian."