Competitive Innovation and Information Flows in a Growing Industry

Abstract

Case studies reveal a pattern of rapid industrial growth propelled by innovation and quick diffusion of new technologies, especially among emerging industries exposed to global competition. At the firm level, the distribution of innovative activity is highly skewed, while productivity growth is not strongly related to a firm's innovative activity. In this paper, we develop a dynamic model of a competitive industry that is consistent with these stylized facts. We derive an equilibrium growth path, along which a leading firm invests in increasing the stock of technological knowledge and chooses not to prevent spillovers to other firms as long as the industry remains relatively small. As the industry expands including new entry, the leader's optimal amount of investment gradually declines. The leading firm may also choose to start keeping its innovations secret somewhere along the equilibrium growth path, bringing technology diffusion and further expansion of the industry to a halt. Policy implications include beneficial effects of the absence of tariff protection, and possible beneficial effects of moderate costs of intellectual property rights protection.