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Product and Process Innovation in a Growth Model of Firm Selection

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  • Cristiana Benedetti Fasil
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    Abstract

    Recent empirical evidence based on firm level data emphasizes firm heterogeneity in innovation activities and the different effects of process and product innovations on the productivity level and productivity growth. To match this evidence, this paper develops an endogenous growth model with two sources of firm heterogeneity: production efficiency and product quality.Both attributes evolve endogenously through firms’ innovation choices. Growth is driven by innovation and self-selection of firms and sustained by entrants who imitate incumbents. Calibrating the economy to match the Spanish manufacturing sector, the model enables to quantify the different effects of selection, innovation, and imitation as well as product and process innovation on growth. Compared to single attribute models of firm heterogeneity, the model provides a more complete characterization of firms’ innovation choices explaining the partition of firms along different innovation strategies and generating consistent firm size distributions.

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    Bibliographic Info

    Paper provided by European University Institute in its series Economics Working Papers with number ECO2009/30.

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    Date of creation: 2009
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    Handle: RePEc:eui:euiwps:eco2009/30

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    Keywords: endogenous growth theory; firm dynamics; heterogeneous firms; productivity; quality; innovation;

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