The Effects of Disruptive Innovations on Productivity

By reinterpreting the literature on disruptive innovation using macroeconomic tools, we observe that the standard measure of total factor productivity (TFP) can only be used in relation to sustaining innovations. This paper provides a new measure of TFP for studying the effects of disruptive innovations on productivity growth. We reveal disruptive innovations to exert two distinct effects on TFP: the crowding-out effect on the GDP; and the substitution effect on the factor market. Using information from the KLEMS database pertaining to three representative countries (Korea, the United States and Italy) for the years 1973 to 2005, we show that the effects of disruptive innovations constitute important aspects of the productivity measure. In addition, we observe that the direction and the effects of technological change vary considerably across time and between countries. Finally, we observe that the magnitude of the crowding-out effect of disruptive innovations is almost always greater than that of the substitution effect.