How Destructive is Innovation?

41 Pages Posted: 11 Jan 2017

See all articles by Daniel Garcia-Macia

Daniel Garcia-Macia

International Monetary Fund (IMF) - European Department

Chang-Tai Hsieh

University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Peter J. Klenow

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 01, 2017

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 non-farm private businesses from 1976–1986 and 2003–2013, 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.

Suggested Citation

Garcia-Macia, Daniel and Hsieh, Chang-Tai and Klenow, Peter J., How Destructive is Innovation? (January 01, 2017). US Census Bureau Center for Economic Studies Paper No. CES-WP-17-04. Available at SSRN: https://ssrn.com/abstract=2896913 or http://dx.doi.org/10.2139/ssrn.2896913

Daniel Garcia-Macia (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
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Chang-Tai Hsieh

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
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National Bureau of Economic Research (NBER)

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Peter J. Klenow

Stanford University - Department of Economics ( email )

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579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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