The dark side of creative destruction: innovation and retirement of capital

Abstract

The process of creative destruction, while propelling the economy, also leads to obsolescence and discarding of capital. To date, there is limited empirical evidence on actual discard behavior by firms and its determinants. Building on insights from the theoretical literature on economic growth and obsolescence, this article makes an attempt to understand the determinants of scrapping, with a special focus on the role of innovation. The article uses a unique database on asset retirements by manufacturing firms in the Netherlands and relates it to a range of economic and innovation variables. We find that innovation plays a significant role in determining the discard of capital assets. Process innovation by a firm is important in the case of machinery scrapping, while the introduction of a new product in a firm increases discards of computers. We also find evidence for an obsolescence effect: the average age has a significant role in discarding, in particular, computers. We find no evidence for a significant role of output and wage rates in driving capital discard.