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Product and Process Innovation in a Growth Model of Firm Selection

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  • Cristiana Benedetti Fasil

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.

Suggested Citation

  • Cristiana Benedetti Fasil, 2009. "Product and Process Innovation in a Growth Model of Firm Selection," Economics Working Papers ECO2009/30, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2009/30
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    References listed on IDEAS

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    More about this item

    Keywords

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

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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