SUBSTITUTION AND COMPLEMENTARITY IN ENDOGENOUS INNOVATION

The influence of Schumpeter's notion of ''creative destruction'' may h ave led to an overemphasis on substitution between technologies in rec ent models of endogenous innovation. Historical examples of technologi cal change suggest that new technologies may just as frequently comple ment older technologies, creating, rather than destroying, rents. Ackn owledgment of the potential for both substitution and complementarity among inventions allows for a much richer characterization of the grow th process, creating the possibility of threshold effects and multiple equilibria and bringing to the forefront the important role played by the expectations of inventive entrepreneurs.