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Soundwave said:
I can see it, they had done the DKC series, so Diddy Kong Racing being rebooted would make sense in Nintendo's eyes, but Miyamoto probably suggested they use Star Fox characters instead as Nintendo doesn't own many of the DKR characters any longer and this project was likely starting up around the time Miyamoto was working on Star Fox 0.

It could also be the case where Star Fox was chosen as a result of Nintendo's development processes

I might be misremembering, but didn't Nintendo say they focus on the gameplay first and then build the world/setting of the game around that after and sometimes choose an existing IP for it if it works in that situation?

So it could have been the type of thing where Retro was just working on gameplay for a racing game and felt that the Star Fox IP best suited what they were making so they went with that.