Abstract

We document structural change in innovation using historical patent data starting in the 1850s, and R&D expenditure and TFP growth since 1947. Innovation moved from agricultural sectors to manufacturing, and subsequently to services. To account for this structural change in innovation, we develop a multi-sector endogenous growth model in which the direction of innovation evolves endogenously. The model provides a general equilibrium framework that incorporates the classical demand-pull and technology-push drivers of innovation. Sectors differ in their innovation technologies, and the extent to which they benefit from knowledge spillovers (technology-push). Due to nonhomotheticity in demand, relative sectors’ market sizes move towards income-elastic sectors along the growth process (demand pull). A robust prediction is that the rate of innovation growth is asymptotically higher in more income-elastic sectors. A calibrated version of our model is able to account for the joint structural change in innovation and sectoral output observed in the US. Our framework can also be used to assess future paths of sectoral productivity (to evaluate the potential extent of Baumol’s disease) and optimal innovation policy.

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