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Receptivity and Innovation

Furukawa, Yuichi and Lai, Tat-kei and Sato, Kenji (2017): Receptivity and Innovation.

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Abstract

In this study, we investigate the role of receptivity to novelty in innovation and long-run economic growth. Consumers' receptivity to novelty, as an individual propensity toward new goods, might be perceived to encourage innovation and economic growth at the aggregate level unambiguously. Recent evidence, however, suggests an inverted U-shaped relationship between average receptivity and macroeconomic performance in terms of innovation and growth; receptivity may not always be good for the aggregate economy. To capture a mechanism behind this fact, we develop a new R&D-based growth model with the understanding that innovation consists of two separate activities of inventing new goods and introducing them to the society. In our model, consumer receptivity encourages firms to invent but discourages them from introducing. Interacted with population size and the elasticity of substitution, these opposing forces generate a non-monotonic relationship. While economies with moderate receptivity can achieve sustained innovation and thereby long-run growth, those with too much or too little receptivity are likely to be caught in an underdevelopment trap, in which innovations eventually fail. These results suggest a theory that explains the inverted U.

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