Growth Through Heterogeneous Innovations

Innovation and Economic Growth, Intellectual Property and Patents

Article Snapshot


Ufuk Akcigit and William R. Kerr


Journal of Political Economy, Vol. 126, No. 4, pp. 1374-1443, 2018


A firm’s size affects its choice of innovation strategy. A new economic model of innovation helps explain the tendency of new entrants and incumbent producers to innovate differently, and their differing effects of economic growth.

Policy Relevance

Investment in new products spurs more growth than improvements to existing products. The model could help measure the importance of intellectual property rights to innovation.

Main Points

  • Firms undertake “external” innovation by creating new product lines; “internal” innovation results from improvements to existing product lines.
  • A new, more sophisticated model allows economists to explore three additional characteristics of economic growth:
    • The model links firm size to innovation choices.
    • The model uses patents and patent citations to gauge the importance of innovations.
    • The model allows consideration of the effect of firm scale on innovation costs (a large firm must spend 25% more than a smaller firm to produce a major innovation).
  • Empirical evidence shows that small firms innovate at a greater pace than large firms, and small firms grow faster than large firms; also, large firms produce fewer patents per employee than small firms.
  • Small firms grow faster than large firms because large firms direct less research and development (R&D) to external innovation; growth from internal innovation is the same for large and small firms.
  • Because growth of entirely new technologies tends to be slow, patent counts and patent citations show that innovation is tilted towards follow-on inventions that cite earlier inventions.
  • Comparing empirical data to simulated data from the new model shows that external innovations are more potent than internal innovation in spurring growth; ten follow-on innovations must occur before the value of these innovations falls below that of an internal innovation.
  • Comparing empirical data to simulated data from the model confirms that about 26% of total growth is driven by new entrants; external innovation by incumbent firms accounts for about 75% of the productivity growth for those firms.


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