Reallocating Innovative Resources Around Growth Bottlenecks

Economy-wide increasing returns to scale embodied in a general purpose technology (GPT) and its applications are often a key source of long-run growth. Yet the successful exploitation of increasing returns calls for coordination on a particular technological direction, reducing flexibility and choice ex post and potentially creating a growth bottleneck. We examine how such a growth bottleneck can eventually be overcome under certain key conditions. Demand must be fundamentally diverse so that the original GPT does not serve all demanders. Firms barred from entry into the primary GPT market can then reallocate innovative resources to create new markets to meet the unserved demand. The demand in these new markets must be valuable enough to generate a positive feedback cycle that results in considerable technical advance in the alternative GPT. This ultimately can lead to indirect entry by the alternative GPT into the original GPT market if and when it becomes strong enough to compete with the original GPT. We illustrate the role of this sequence in the two most important technologies for automating white-collar work of the last 50 years.