Innovation by Entrants and Incumbents

Abstract

We extend the basic Schumpeterian endogenous growth model by allowing incumbents to undertake innovations to improve their products, while entrants engage in more "radical" innovations to replace incumbents. Our model provides a tractable framework for the analysis of growth driven by both entry of new …rms and productivity improvements by continuing …rms. Unlike in the basic Schumpeterian models, subsidies to potential entrants might decrease economic growth because they discourage productivity improvements by incumbents in response to reduced entry, which may outweigh the positive e¤ect of greater creative destruction. As the model features entry of new …rms and expansion and exit of existing …rms, it also generates a non-degenerate equilibrium …rm size distribution. We show that, when there is also costly imitation preventing any sector from falling too far below the average, the stationary …rm size distribution is Pareto with an exponent approximately equal to one (the so-called "Zipf distribution").We thank Sam Kortum, Erzo Luttmer, Ariel Pakes, and seminar participants at MIT and Toulouse Network on Information Technology Conference at Seattle for useful comments. We are particularly grateful to Xavier Gabaix for numerous useful suggestions at the early stages of this project. Financial support from the Toulouse Network on Information Technology is gratefully acknowledged.

Leadership Cycles in a Quality‐Ladder Model of Endogenous Growth

“…Now we re-examine the property discussed above from a slightly different angle, namely, the negative correlation between firm size (or age) and growth, which implies a failure of Gibrat's law. This is a specific implication of our model which distinguishes it from previous theories in which both leaders and outsiders invest in R&D, including Segerstrom and Zolnierek (1999), Klette and Kortum (2004), Segerstrom (2007) and Acemoglu and Cao (2010), which all predict that firm growth is independent of its size and age.…”

“…34 This objective could also be achieved with other policy tools, such as competition policy. Different from Acemoglu and Cao (2010), however, in our model taxing outsidersÕ R&D without subsidising the leadersÕ definitely harms R&D investment and growth. 35…”

Financial Constraints and Innovation: Why Poor Countries Don't Catch Up

“…Another interesting question to explore would be whether there are any significant differences in the nature of investments by old versus new firms. Acemoglu and Cao (2010) argue that incumbents are more likely to undertake incremental innovations whereas new entrants are more likely to embark on radical innovations. Unfortunately, our data do not allow us to trace this distinction.…”

Betting On Exports: Trade and Endogenous Heterogeneity

“…To the best of our knowledge, the link between innovation choices and the variability of technology has received little attention. Some papers consider the distinction between radical and incremental innovation (Acemoglu and Cao, 2015). But these types of innovations differ more in the degree to which they replace or complement existing technologies, rather than in the variance of the potential outcomes.…”