Growth through Innovation Bursts

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• Abstract: In theories of creative destruction, product innovation is a key driver of aggregate economic growth. 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, 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.