Quality Growth: From Process to Product Innovation Along the Path of Development

We propose a demand-driven growth theory where process innovations and product innovations fulfil sequential roles along the growth path. Process innovations must initially set the economy on a positive growth path. However, process innovations alone cannot fuel growth forever, as their benefits display an inherent tendency to wane. Product innovations are therefore also needed for the economy to keep growing in the long run. When the economy fails to switch from a growth regime steered by process innovation to one driven by product innovation, R&D effort and growth will eventually come to a halt. However, when the switch to a product innovation growth regime does take place, a virtuous circle gets ignited. This happens because product innovation effort not only keeps growth alive when incentives to undertake process innovation diminish, but it also regenerates profit prospects from further process innovation effort.