How Destructive is Innovation?

Daniel Garcia-Macia, Chang-Tai Hsieh, Peter J. Klenow
2017 Social Science Research Network  
Entering and incumbent firms can create new products and displace other firms' products. Incumbents can also improve their existing products. How much of aggregate growth occurs through each of these channels? Using U.S. Census data on manufacturing firms from 1963 through 2002, we arrive at three main conclusions: First, most growth has seemed to come from incumbents' innovation rather than innovation by entrants. We infer this from the modest market share of entering firms. Second, most
more » ... Second, most growth seems to have come from improvements of existing varieties rather than creation of brand new varieties. We infer this because firm exit rates fall only gradually as firms expand, suggesting they are not accumulating a larger set of products. Third, own-product improvements by incumbents appear to have been more important than creative destruction. We infer this because the distribution of firm growth rates has had thinner tails than implied by a model in which growth is entirely due to creative destruction.
doi:10.2139/ssrn.2896913 fatcat:sry7lqxekjdudlb67dvzcu63wm