Innovating the transport technology or the production process? The answer to an R&D dilemma

We compare two different types of R&D, the traditional process innovating activity and an investment in logistics that reduces transport and communication costs. With relevant spillovers or in large markets firms invest to lower the cost that shows a comparative advantage. When spillovers are relatively low and/or the size of the market is smaller the profitability of R&D in transport and communication is higher if transport has a comparative advantage and if the productivity of R&D is below a certain threshold level. Hence, there are circumstances in which firms would get a higher profit by improving the logistics of their sale organisation rather than by reducing production costs. This establishes a dominance of one R&D over the other contingent upon the scenario in which they are carried out.