Incremental Innovation by Heterogeneous Incumbents and Economic Growth: relationship between two sources of growth

Kazuyoshi Ohki

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we construct a tractable endogenous growth model that incorporates both incremental innovation by heterogeneous incumbents and innovation by entrants. Our model features two endogenous sources of growth: quality improvement (vertical growth) and expansion in the variety of goods (horizontal growth). We then examine the policy effects of a subsidy for incremental innovation by incumbents and a subsidy for innovation by entrants on the overall economic growth rate, as well as on the relationship between the two sources of growth. Our model confirms that incumbents with higher profit flows tend to engage in incremental innovation for a longer duration and incur greater innovation costs, which is consistent with both Schumpeter's hypothesis and the findings of Christensen (1997) Additionally, the model generates counterintuitive results that are not commonly found in the conventional literature. First, a subsidy for incremental innovation by incumbents may reduce the entry of new firms. Second, a subsidy for innovation by entrants may have a negative effect on the overall economic growth rate.

Keywords: Economic Growth; \&D; In-house model; Firm-Heterogeneity; Innovation by Incumbents; IPR policy; Incremental Innovation; Sustaining Innovation (search for similar items in EconPapers)
JEL-codes: O31 O32 O33 O34 O41 (search for similar items in EconPapers)
Date: 2025
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