Technology Choice, Spillovers, and the Concentration of R&D

Abstract

The direction of innovation shapes both current technologies and future innovation opportunities, as firms acquire expertise and create public knowledge through discovery. But how do firms choose which technologies to develop? Do they ever fail to exploit new technological paradigms? I build a new model of innovation and firm dynamics to study a novel link between market structure, the direction of innovation, and economic growth: Expertise in a current technology gives incumbents a comparative advantage at innovating it relative to entrants, who instead favor a new technology with higher growth potential. Each firm's innovation decisions influence others through knowledge spillovers, so the initial market structure can affect the long-run direction of innovation. Concentrating R&D resources in a small number of firms allows faster accumulation of expertise, raising growth when all firms innovate the same technology. But it can lower growth when firms face a technology choice, amplifying the influence of incumbents and potentially delaying or preventing the emergence of the new technology. I provide empirical evidence for the theory using data on firm patenting and R&D expenditures. I also show that it explains the historical development of mRNA vaccines, and I explore its implications for the highly concentrated innovation of artificial intelligence.

Keywords: innovation, directed technological change, firm dynamics, technology paradigms, economic growth

JEL Classification: L16, L25, O31, O33, O41