Innovation by Heterogeneous Leaders

We develop a Schumpeterian growth model that differs from the quality-ladder model in the following two ways. First, the size of the quality increment is determined by a random draw from a given distribution, and consequently leader firms are different in terms of their quality lead over their followers, and thus have different profit flows. Second, we assume that the R&D technology of leader firms exhibits diminishing returns, and consequently some leader firms engage in R&D activities. The results show that leaders with larger quality leads over their followers make smaller R&D investments and tend to be replaced more rapidly; this result is consistent with the behaviors of some previous leader firms such as Sony and Eastman-Kodak. Moreover, we show that subsidizing followers f R&D can promote leaders f aggregate R&D. Subsidies for followers f R&D promote their R&D and impede individual leader firms f R&D. However, promotion of followers f R&D decreases the number of leaders with larger quality leads and smaller R&D investments and increases that of leaders with smaller quality leads and larger R&D investments. If this positive effect from a changed distribution outweighs the negative effects on individual firms f R&D, promotion of followers f R&D increases leaders f aggregate R&D.