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The hypothesis that the relative innovative advantage between large and small firms is determined by market concentration, the extent of entry barriers, the composition of firm size within the industry, and the overall importance of innovation activity is tested. We find that large firms tend to have the relative innovative advantage in industries which are capital-intensive, concentrated, highly unionized, and produce a differentiated good. The small firms tend to have the relative advantage in industries which are highly innovative, utilize a large component of skilled labor, and tend to be composed of a relatively high proportion of large firms.