On research and development in a model of Schumpeterian economic growth in a creative region

•We analyze the nature of R&D that leads to Schumpeterian economic growth in a creative region.•The engine of economic growth is process innovations leading to quality improvements in machines.•In the BGP equilibrium, growth is unbalanced since R&D occurs only on the highest quality machine.•A policymaker can ensure balanced growth in the sense that there is R&D across all the machines.

We analyze the nature of research and development (R&D) that leads to Schumpeterian economic growth in a region that is creative in the sense of Richard Florida. The engine of economic growth in our creative region is process innovations that lead to quality improvements in the machines that are used to produce a final consumption good. We accomplish two main tasks. First, we show that in the so called balanced growth path (BGP) equilibrium, growth is unbalanced because R&D takes place only on the machine line with the highest quality. Second, we show how a policymaker can alter the basic model so that the resulting equilibrium has balanced growth in the sense that there is R&D across all the different machine lines.