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How important is innovation in small and medium size firms? What do their R&D strategies depend on? In this article we answer these questions with new data from a sample of small and medium size Catalan firms. We explain how R&D intensity varies according to demand, technological opportunity and appropriability conditions of the industrial sector to which the firm belongs; and we present the in-house technology development and technology acquisition strategies followed by the most competitive firms. [ABSTRACT FROM PUBLISHER]