Abstract
This paper introduces the dynamical framework which combines product and process innovations. The model contributes to the theoretical literature on innovations in two ways. First, it permits for the simultaneous dynamics of both types of innovations which is rarely considered in the literature. Second, the products being generated by the innovations are heterogeneous in their investment characteristics. This allows for the formation of the dynamic interdependency between both types of innovations. As a result, the steady-state levels of process innovations for each product are different and influence the dynamics of product innovations in turn.
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