Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Growth through Heterogeneous Innovations

April 2015
Ufuk Akcigit, William Kerr

We study how external versus internal innovations promote economic growth through a tractable endogenous growth framework with multiple innovation sizes, multi-product firms, and entry/exit. Firms invest in external R&D to acquire new product lines and in internal R&D to improve their existing product lines. A baseline model derives the theoretical implications of weaker scaling for external R&D versus internal R&D, and the resulting predictions align with observed empirical regularities for innovative firms. Quantifying a generalized model for the recent U.S. economy using matched Census Bureau and patent data, we observe a modest departure for external R&D from perfect scaling frameworks.