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.

What Do We Learn From Schumpeterian Growth Theory?

“…The equilibrium growth rate under laissez-faire is correspondingly suboptimal or excessive compared to the socially optimal growth rate. 7 More generally, if zt units of labor are invested in R&D during the time interval [t; t + dt]; the probability of innovation during this time interval is ztdt: probability dt and then get V k+1 , whereas she gets nothing if she does not innovate. 8 The research arbitrage equation is then simply expressed as:…”

Innovation, Diffusion, Growth and the Environment: Taking Stock and Charting New Directions

“…renewable energy), which may be developed by new entrants challenging the established organisation and structure of the market (van der Ploeg 2016; Noailly and Smeets 2015). The innovation and growth literature provides useful insights to understand how technological transitions can take place via innovation from heterogeneous firms (Klette and Kortum 2004;Acemoglu and Cao 2010) 3 and documents some key stylized facts about innovating firms, namely: (i) the distribution of R&D intensity among firms tend to be highly skewed; (ii) large established firms innovate a lot but tend to focus on improving existing technologies (Cohen and Klepper 1992;Akcigit and Kerr 2010); (iii) small firms and new entrants are often believed to be the source of more major and radical innovations than large firms (Akcigit 2011;Kamien and Schwartz 1975). Applying these insights to the electricity generation sector, Noailly and Smeets (2015) find that the reduction in the aggregate technology gap between fossil-fuel and renewable patenting activities observed in recent years has been mainly induced by increased entry of small firms specialized in renewable innovation.…”

The Inter-temporal Dimension to Knowledge Spillovers: Any Non-environmental Reason to Support Clean Innovation?

“…As a matter of fact, a large strand of literature documents that research happens mostly in-house, and that established firms undertake incremental innovation improving their existing products (Malerba et al,3 Time index t will be dropped within the text when no confusion arises. 4 See for example Acemoglu (2008, Chapter 14). 1997; Acemoglu and Cao, 2015). A firm's research also benefits from knowledge spillovers.…”