Product and Process Innovation in a Growth Model of Firm Selection

Cristiana Benedetti Fasil

No ECO2009/30, Economics Working Papers from European University Institute

Abstract: Recent empirical evidence based on firm level data emphasizes firm heterogeneity in innovation activities and the different effects of process and product innovations on the productivity level and productivity growth. To match this evidence, this paper develops an endogenous growth model with two sources of firm heterogeneity: production efficiency and product quality.Both attributes evolve endogenously through firms’ innovation choices. Growth is driven by innovation and self-selection of firms and sustained by entrants who imitate incumbents. Calibrating the economy to match the Spanish manufacturing sector, the model enables to quantify the different effects of selection, innovation, and imitation as well as product and process innovation on growth. Compared to single attribute models of firm heterogeneity, the model provides a more complete characterization of firms’ innovation choices explaining the partition of firms along different innovation strategies and generating consistent firm size distributions.

Keywords: endogenous growth theory; firm dynamics; heterogeneous firms; productivity; quality; innovation (search for similar items in EconPapers)
JEL-codes: L11 L16 O14 O31 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse, nep-eff, nep-ent, nep-fdg, nep-ino, nep-pke, nep-sbm and nep-tid
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2009/30

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