The economic implications of incremental vs novel innovation
This working paper by Timothy F. Bresnahan, Shane Greenstein, and Pai-Ling Yin examines how firms create value through co-invention when adopting Consumer Computing Technologies (CCTs)—specifically the World Wide Web and mobile ecosystems. The study distinguishes between two fundamentally different approaches to innovation and their economic implications.
Methodology
The study employs a theoretical framework distinguishing two co-invention regimes: incremental co-invention, where firms expand existing services through Consumer Computing Technologies (CCTs) with low cost and predictable returns proportional to existing customer base, and novel co-invention, involving entirely new products or services requiring significant operational changes with high costs but potentially transformative returns.
Empirically, the researchers use multiple datasets and time periods. For the proportionality benchmark, they analyze 20-year longitudinal data (1993-2013) on local radio stations and newspapers to examine how pre-CCT audience sizes predict post-CCT success. For broader cross-sectional analysis, they compile comprehensive usage data from ComScore covering approximately 2,400 web applications and smartphone apps in 2013.
The methodology involves forensic research to link each product to its co-inventing firm and classify innovation regimes, developing a novel product classification system to address limitations of existing NAICS codes. They measure success through consumer attention received via CCTs, using ranking data from sources like Quantcast and Alexa as proxies for usage patterns.
Findings
- The research reveals striking differences between innovation regimes. Novel co-invention dominates value creation, accounting for 94% of total observed value despite being rarer and more geographically concentrated, while incremental co-invention represents only 6% of total value but is more widely distributed across regions, industries, and firms.
- Geographic concentration is extreme for novel innovation. Four regions—San Francisco Bay Area, New York, Seattle, and Los Angeles—dominate high-value innovations, with novel co-invention benefiting from local knowledge spillovers and domain-specific human capital. Incremental co-invention shows broader geographic distribution following existing business asset patterns.
- Industry concentration is severe. Just five product categories contain most successful innovations: media, consumer information products, games, retail trade, and targeted advertising. Four related media and entertainment industries plus retail trade account for 97% of value from novel co-invention.
New Economic Forces Behind the Value Distribution of Innovation
Authors: Timothy F. Bresnahan, Shane Greenstein, Pai-Ling Yin
From: Stanford University, Harvard University, Amazon, Inc.
The importance of innovative entrepreneurs to economic growth
The paper by Ufuk Akcigit, Harun Alp, Jeremy Pearce, and Marta Prato studies how different types of entrepreneurs—transformative (innovation-oriented) vs. subsistence (survival-oriented)—affect innovation and economic growth using Danish microdata and an endogenous growth model. The authors use administrative microdata from Denmark to classify entrepreneurs as transformative if they hire R&D workers and as subsistence if they do not, applying multinomial logit regressions to uncover how IQ, education, parental background, and income affect the likelihood of different career choices. They construct and calibrate an endogenous growth model in which these individual characteristics determine occupational sorting and firm dynamics, then simulate counterfactual policy changes—like removing educational barriers or introducing subsidies—to measure impacts on talent allocation and economic growth.
Empirical findings
- IQ and education negatively predict general entrepreneurship but positively predict becoming a transformative entrepreneur.
- Parental entrepreneurship strongly predicts entrepreneurial entry.
- Education bottlenecks driven by parental income restrict upward mobility into innovative careers.
- Transformative entrepreneurs run larger, faster‑growing firms that create more jobs and patents.
Model results
- Financial frictions in education cause misallocation of talent; removing them raises growth by 11%, R&D employment by 15%, and transformative entrepreneurship by 7.5%.
- The symbiosis between R&D workers and transformative entrepreneurs accounts for roughly 40% of the overall growth effect from removing educational constraints.
- Education subsidies are the most effective policy: a 0.05%-of-GDP subsidy boosts innovation by 16%, compared to 4% for targeted startup subsidies and 2% for R&D subsidies.
- Optimal policy mix favors education first, then innovative startup support, and R&D subsidies only at higher fiscal budgets.
Transformative and Subsistence Entrepreneurs: Origins and Impacts on Economic Growth
Authors: Ufuk Akcigit, Harun Alp, Jeremy Pearce, Marta Prato
From: University of Chicago, Federal Reserve Board of Governors, Federal Reserve Bank of New York, Bocconi University
