Substitution and Complementarity in Endogenous Innovation

Abstract

The influence of Schumpeter's notion of "creative destruction" may have led to an overemphasis on substitution between technologies in recent models of endogenous innovation. Historical examples of technological change suggest that new technologies may just as frequently complement older technologies, creating, rather than destroying, rents. Acknowledgement of the potential for both substitution and complementarity amongst inventions allows for a much richer characterization of the growth process, creating the possibility of threshold effects and multiple equilibria, and bringing to the forefront the important role played by the expectations of inventive entrepreneurs.