Abstract

In theories of creative destruction, product innovation is a key driver of aggregate growth. This paper confronts the predictions of these theories about product dynamics with empirical patterns in product-level data on French manufacturing firms. We find that the process of product innovation frequently exhibits bursts—episodes in which firms rapidly add multiple products to their portfolio. As a result, 5% of firms are responsible for over 76% of product creation. Bursts lead to substantial shifts in revenue, and the process of product creation and destruction explains 88% of the variance in five-year firm growth. We introduce a model of firm product innovation that is compatible with the data while also nesting the canonical models of creative destruction. We show that innovation bursts alter the equilibrium composition of age, size, and innovation efficiency of firms, and explain the concentration of production among superstar firms. Our model thus enables the joint study of the determinants of industry concentration and growth in a setting consistent with the empirical patterns of product dynamics.

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