The introduction of both product and process innovations is induced by changes in product and factor markets to which firms cannot adjust by means of changes in a given technical space, because of limited information and irreversibility. Firms can face the decline in their performance and the increase in actual costs by changing their technologies and their products. The rate and the direction of technological change, as well as the mix between product and process innovations are endogenous and localized by the key role of irreversibility and by the competence accumulated by means of leaming processes. Proximity in the Lancastrian product space matters in assessing the choice also because of the effects of reputation and substitutability upon mark-ups in a market competition characterized by high levels of product differentiation. Localized product innovation hence confirms all features of a path dependent process.
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