Abstract

In theories of creative destruction, product innovation is a key driver of aggregate economic growth. In this paper, we confront the predictions of these models with the empirical patterns of product innovation, documented based on product-level data on the near-universe of French manufacturing firms. Two key patterns in our data stand in contrast to the workings of the conventional models. First, we find that product innovation is best described as a process of “bursts”–episodes where firms rapidly add a series of products to their portfolio. These bursts lead to substantial shifts in revenue and explain the majority of the variance in firm-level growth. Second, we find that the growth in product-level revenue declines over the course of a product’s life cycle, indicating a diminishing effectiveness of process innovation. Including these features into a quantitative framework that nests the canonical models of creative destruction, we show that innovation bursts explain the concentration of production in a small number of large 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. In a quantitative comparison against the conventional models, our theory attributes to creative destruction a substantially greater impact on aggregate productivity growth and on the concentration of production.

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