The effects of disruptive innovations on productivity

Improvements in productivity have mainly arisen due to technological changes. According to Christensen (1997), a technological change is either disruptive or sustaining. Disruptive innovations are associated with new technologies that cause a shift in the technological paradigm and business routines; they create new products that eventually lead to the demise of existing products. Sustaining innovations reinforce the technological paradigm and business routines; they do not lead to the creation of new products, but rather the development of the existing ones. The literature on disruptive innovation has principally focused on its effects on firms, industries, and markets (Adner and Zemsky, 2005; Christensen and Raynor, 2003; Daneels, 2004; Henderson, 2006; Momeni and Rost, 2016). A key notion in the literature on disruptive innovations is the displacement of established firms in favor of new firms. In order to progress faster, established firms are forced to focus on the traditional mass market. Disruptive innovation creates an opportunity for new firms to occupy emerging market niches. Over time, the new technology itself improves, and potentially occupy an ever-larger share of the market, thus driving the established firms into a shrinking and, ultimately, profitless corner. In this paper, we use a macroeconomic perspective to measure the effects of disruptive innovations on total factor productivity (TFP). The effects of technological change can be distinguished by the level of aggregation (Assink, 2006). Indeed, at the micro and meso level, the displacement of established firms is clearly visible, but at the macro level it is only perceptible as a change in productivity. Reinterpreting these dynamics of productivity according to the seminal paper of Olley and Pakes (1996), we can explain why the displacement of established firms in favor of new firms at the micro and meso level appears as a change in productivity at the macro level. The restructuring of firms, industries and/or markets caused by disruptive innovations impacts the displacement of established and less productive firms in favor of new and more productive firms, as assessed at the micro and meso level of analysis. However, the exit of less productive firms from the market in favor of the entry of more productive firms impacts productivity at the macro level. In other words, the reallocation of factors toward more productive (and new) firms affects overall productivity. Only a few studies focused on the impact of disruptive innovation at the macro level are present in the literature; nevertheless, the effects of disruptive innovation on productivity growth are clear. Scholars agree that at the macro level an additional and consolidated feature of disruptive innovations is a shift in the technological paradigm (Walsh and Linton, 2000; Kostoff et al., 2004; Ho and Lee, 2015; Kaal, 2016). While the effects of sustaining innovation on overall productivity are almost always positive, disruptive innovation can also have a negative impact on productivity. Indeed, the overall value of the effects of disruptive innovation depends on the difference between the positive effect, given by the expansion of new firms, and the negative effect, given by the reduction of established firms (Leipziger and Dodev, 2016). The market share of the established and new firms depends on the factor endowment; therefore, the same disruptive innovation could produce a positive effect in some areas, but a negative effect in others (Figueiredo, 2010). Two macroeconomic effects of disruptive innovations are implicitly described in the literature: crowding-out; and substitution effect (Kostoff et al., 2004; Manyika et al., 2013). The former describes how production reacts to a new technological paradigm (Kassicieh and Rahal, 2007). It is positive when the factor endowment is coherent with the disruption innovation, i.e. when the innovation improves the productivity of the most abundant factor in the economy; when factor endowment is incoherent with disruption innovation, the crowding-out effect is negative. The substitution effect regards the reaction of factors to the new technological paradigm (Frey and Osborne, 2017). It is always negative because it modifies the status quo of the economy and factor endowment is therefore forced to undergo multiple changes in order for production to become efficient again. In this paper, we provide a new measure of TFP to capture all of the effects of disruptive innovations on GDP previously described. We do this in two steps. In the first step, we observe how the standard measure of TFP does not consider the effect of disruptive innovations; thus, we propose a method for measuring TFP that takes this new effect into account. In the second step, in order to separate out the crowding-out and substitution effects of disruptive innovations, we compare the previously published (and incomplete) methods used in the literature to measure the effects of technological changes on TFP with our proposed method. The result is a new measure of TFP that dissociates the