Natural Selection Types and Firm Diversity : An Evolutionary Extension of Endogenous Growth Theory

In this paper, we propose an evolutionary extension of Schumpeterian endogenous growth model with multi-sector by introducing the three types of natural selection: stabilizing selection, directional selection, and disruptive selection. Based on them, the survival of firms is determined in each period. As a metrics of survival rates, we incorporate "firm fitness'' in the economy into a well-known endogenous economic growth model. Moreover, in this model, firms can enter, exit, and move among sectors. In addition, the model permits us to simulate the economy's aggregate productivity as well as firm diversity in the three types of natural selection. For stabilizing and directional selection when firms enter and exit, firm diversity decreases, but aggregate productivity greatly improves. On the other hand, in the case of disruptive selection, aggregate productivity increases only by a small amount, but diversity increases. Thus, stabilizing and directional selection are more effective for improving short-run aggregate productivity. But firms will become weaker in the presence of future environmental changes such as innovations of general-purpose technology, climate changes, and social regime changes, because diversity decreases. With drastic environmental changes, the fall-off in aggregate productivity will be great. In contrast, disruptive selection is not effective for improving short-run aggregate productivity. The economy, however, will become relatively robust in the occurrence of future environmental changes, since firm diversity increases