Receptivity and Innovation

In this study, we investigate the relationship between receptivity to novelty and innovation. Consumers’ receptivity to novelty, as an individual propensity toward new goods, might be perceived to encourage innovation at the aggregate level unambiguously. On analyzing data from the World Values Survey and the World Intellectual Property Organization, however, we find that there is an inverted U-shaped relationship between average receptivity and innovation at country level; receptivity may not always be conducive to innovation. To capture a mechanism behind this counterintuitive fact, we develop a new dynamic general equilibrium model with the understanding that innovation consists of two separate activities of inventing new goods and introducing them to the society. In our model, consumer receptivity encourages firms to invent but discourages them from introducing. Interacted with population size and the elasticity of substitution, these opposing forces generate a non-monotonic relationship. While economies with moderate receptivity can achieve sustained innovation and thereby long-run growth, those with too much or too little receptivity are likely to be caught in an underdevelopment trap, in which innovations eventually fail. These results suggest a theory that explains the inverted-U.