Interaction of Drastic and Incremental Innovations: Economic Development Through Schumpeterian Waves

Abstract

This paper establishes a model, where up-stream firms 'produce' drastic innovations and down-stream firms specialize in final goods production. A drastic innovation obsolesces the existing technology but down-stream firms can improve it by their incremental innovations. The economy develops in waves, where each wave is surged by a great leap forward in technology and followed by a sequential of adjustments. It is found that if next drastic innovation comes sooner, efforts in current drastic innovation fall but efforts in incremental innovations rise. More investment by down-stream firms in incremental R&D reduces up-stream firms' incentives in drastic R&D. The comparative static analysis shows that a reduction in the expnsiveness of drastic innovation, and an increase in the sale of down-stream firms and in the insignificance of drastic innovation and in the duration of a drastic technology will raise (reduce) drastic (incremental) R&D efforts.

Keywords: Drastic innovation, Incremental innovation, Development, Schumpeterian dynamics

JEL Classification: O31