Introduction to Modern Economic Growth same product line More importantly, when a particular firm is sufficiently ahead of its rival, it undertakes less R&D Therefore, this model, contrary to the baseline Schumpeterian model and also contrary to all expanding varieties models, implies that greater competition may lead to higher growth rates Greater competition generated by closing the gap between the followers and leaders induces the leaders to undertake more R&D in order to escape the competition from the followers 14.4 Taking Stock This chapter introduced the basic Schumpeterian model of economic growth, which we referred to as a model of “competitive innovations” to emphasize the importance of competition among firms both in the innovation process and in the product market Competitive innovations lead to a process of creative destruction, where new products or machines replace older models, and thus new firms replace incumbent producers The baseline model features process innovations leading to quality improvements The description of economic growth that emerges from this model is, in many ways, more realistic than the expanding variety models In particular, technological progress does not always correspond to new products or machines complementing existing ones, but involves the creation of higher-quality producers replacing incumbents Arrow’s replacement effect, discussed in Chapter 12, implies that there is a strong incentive for new entrants to undertake researchbecause the new, higherquality products will replace the products of incumbents, leading to the process of creative destruction Even though the description of economic growth in this model is richer than the expanding varieties model, the mathematical structure turns out to be quite similar to the models we studied in the previous chapters In reduced form, the model again resembles an AK economy The main difference is that now the growth rate of the economy, through the rate of replacement of old products, affects the value of innovation Nevertheless, in the baseline version of the model, the effects of various policy interventions are the same as in the expanding product variety model of the previous chapter An important insight of Schumpeterian models is that growth comes with potential conflict of interest The process of creative destruction destroys the monopoly 645