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How Destructive is Innovation?

Jul 2015
Working Paper
Daniel Garcia-Macia, Chang-Tai Hsieh, Peter J. Klenow

Entering and incumbent plants can create new products and displace existing products. Incumbents can also improve their existing products. How much of aggregate growth occurs through each of these channels? Using U.S. Census data on manufacturing plants from 1992, 1997 and 2002, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering plants. Second, most growth seems occur through improvements of existing varieties rather than creation of brand new varieties. We infer this because of modest net entry of plants and gently falling exit rates as plants expand (the latter suggesting bigger plants produce better products more than a wider array of products). Third, own-product improvements by incumbents appear to have been more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than if growth mostly came from creative destruction.

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