Interaction of Drastic and Incremental Innovations strongEconomicstrong.pdf

Interaction of Drastic and Incremental Innovations: Economic * Development through Schumpeterian Waves Xiangkang Yin La Trobe University Ehud Zuscovitch BETA-CNRS and Ben Gurion University of the Negev October 1999 Correspondence to: Dr Xiangkang Yin, School of Business, La Trobe University, Bundoora, Victoria 3083, AUSTRALIA. Fax: 61-3-9479 1654. E-mail: x.yin@latrobe.edu.au * We acknowledge fruitful discussions with Moshe Justman and helpful comments from seminar participants at Ben Gurion University of the Negev. ABSTRACT – Technological progress as a major source of economic development stems from the interaction of two types of innovations, drastic and incremental. While the former sets the fundamental pace of economic progress by redefining production possibilities as Schumpeter strongly emphasized, the latter takes the basic framework as given but pushes the production possibilities frontier outwards marginally in production practice. This paper studies the dynamic interaction and effects of these endogenously- determined innovations. Upstream firms in the model “produce” drastic innovation, which turns out brand new technology and obsolesces the existing technology used by downstream firms that specialize in final goods production. After the downstream firms adopt the new technology, they can improve it further by their incremental innovations. Economic development is shaped as successive Schumpeterian waves, where each wave begins with a great leap forward in technology which is followed by a sequence of adjustments. It