This paper compares the role of innovation on productivity growth for entrants and incumbents. Creating a novel representative micro data set for both groups of firms in Germany, we find that entrants experience significantly larger gains from investments in R&D than incumbents. Entrants’ returns to innovation are also considerably more heterogeneous, with output elasticities ranging from -4.5 to 12.4% along the conditional productivity distribution, while incumbents’ benefits are in a fairly small band-width of 1.4 to 3.4%. Finally, our findings reveal differential learning effects of entrants and incumbents from knowledge that is produced outside their own firm boundaries. Both entrants and incumbents benefit from regional spillover effects within and across industry sectors. Within industries, these spillovers seem to mainly be driven by aggregate productivity but we also provide evidence of incumbents learning from entrants’ R&D investments.
Incumbents and Entrants as Carriers of Innovation and Productivity Growth