This article evaluates the long-standing argument that Australian R&D levels are low because of the restrictions imposed by scale economies in production. In so doing, it is assumed that there are no intrinsic advantages or disadvantages to the integration of research and production activities within a single firm. The rents that Australian firms could accrue by selling innovations to overseas firms with production capabilities are then determined. It is demonstrated that existing overseas firms with their own in-house research units will have a greater intrinsic willingness to pay for innovations. Hence, they will spend relatively more on R&D and innovate more often than Australian research-oriented firms.