The Temporal Crowding-Out Hypothesis: Why High-Tech Investment Hurts Short-Run Finances but Fuels Long-Run Growth

Jo (2025) finds a striking anomaly: higher technology levels improve long-run growth yet dampen short-term financial performance, while business model innovation pays off with a lag. We theorize a “temporal crowding-out” mechanism: frontier tech adoption triggers intra-firm creative self-destruction (cannibalization, capability retooling) that temporarily displaces revenue-generating routines. We integrate Schumpeterian stepping-on-toes vs. standing-on-shoulders externalities into a dynamic firm model (Kirchhoff et al., 2013; Lange, 2006), and connect to Chen et al. (2019) by asking: can state-contingent capital taxation or targeted venture certification (as in Jo’s moderator) offset near-term cashflow shocks without dulling long-term incentives? The novelty is synthesizing firm-level empirical paradoxes with macro optimal-tax results to design “transition-smoothing” instruments (time-limited loss carrybacks, milestone-triggered tax credits) that reduce short-run financial penalties from creative self-destruction. This could reshape how investors price technological bets and how governments structure pro-innovation fiscal policy.

References:

1. Neo‐Marshellian Equilibrium versus Schumpeterian Creative Destruction: Its Impact on Business Research and Economic Policy. B. Kirchhoff, J. Linton, S. Walsh (2013).
2. Internal capabilities and business confirmation: trajectories of emerging ventures. Hyeon Jo (2025). Management Decision.
3. When Management Theory Meets Economics: Towards Innovation and a Dynamic Growth Model of the Firm. T. Lange (2006).
4. Optimal capital taxation in an economy with innovation-driven growth. Ping-ho Chen, A. Chu, H. Chu, Ching‐chong Lai (2019). Macroeconomic Dynamics.