How Destructive Is Innovation?

Abstract

Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate productivity growth occurs through each of these channels? Using data from the U.S. Longitudinal Business Database on all nonfarm private businesses from 1983 to 2013, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own‐product improvements by incumbents appear to be more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.

Inflation and Growth: A Non-Monotonic Relationship in an Innovation-Driven Economy

“…This theoretical attribute is also available in Howitt (1999) in that the economic growth rate is eventually supported by the growth from creative destruction (vertical innovation) rather than variety expansion (horizontal innovation) in the steady-state equilibrium. In addition, this implication is consistent with the empirical finding in Garcia-Macia et al (2016), who decompose the aggregate total factor productivity growth for the US within the periods 1976-1986 and 2003-2013 and find that the contribution of growth from creative destruction is overwhelmingly larger than that from new varieties.…”

Firm Entry and Exit and Aggregate Growth

“…They find that incumbents account for the bulk of productivity growth in the economy. Although their results are consistent with the results of FHK for the manufacturing sector, we should be cautious in comparing the two results, since Garcia-Macia et al (2016) do not use the FHK decomposition but rather use a decomposition derived from their model. We set g , which determines the efficiency growth rate of continuing firms, to match the contribution of entry and exit to U.S. aggregate manufacturing productivity growth, which FHK find to be 25 percent.…”

“…We are not aware of any work that calculates the FHK productivity decomposition for the entire U.S. economy. The paper by Garcia-Macia et al (2016), however, is one of the few papers that use data for the entire U.S. economy to study the relative importance of incumbents and entrants in accounting for productivity growth. They find that incumbents account for the bulk of productivity growth in the economy.…”

“…While it is not derived from a structural model, it is widely used in the literature, allowing us to use the findings from other papers to complement our study of Chile and Korea. In comparison with Garcia-Macia et al (2016), the scope of our study is broader: In addition to the United States, we study many countries and trace out the importance of net entry in productivity growth in both fast-and slow-growing economies.…”

Competition, patent protection, and innovation with heterogeneous firms in an endogenous market structure

“…Moreover, recent empirical studies (e.g., Bartelsman & Doms, ; Garcia‐Macia, Hsieh, & Klenow, ) find that existing firms’ own‐product improvement is a major source of economic growth, rather than creative destruction by market entrants. In particular, Garcia‐Macia et al () report that 80.2% of total‐factor productivity (TFP) growth for 2003–2013 in the United States is attributed to innovation by existing firms. For simplicity, in our model, we assume that R&D is performed only by existing firms that are producing goods for the market.…”