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Many recent models have been developed to fit the basic facts on establishment and industry evolution. While these models yield a simple interpretation of the basic features of the data, they are too stylized to confront the micro-level data in a more formal quantitative analysis. In this paper, the author develops a model in which establishments grow by innovating new products. By introducing heterogeneity to a stylized industry evolution model, the analysis succeeds in explaining several features of the data, such as the thick right tail of the size distribution and the relations between age, size, and the hazard rate of exit, which had eluded existing models. In the model, heterogeneity in producer behavior arises through a combination of exogenous efficiency differences and accumulated innovations resulting from past endogenous research and development investments. Integrating these forces allows the model to perform well quantitatively in fitting data on Chilean manufacturers. The counterfactual experiments show how producers respond to research and development subsidies and more competitive market environments.

Data analysis --- Development research --- E-Business --- Economic Theory and Research --- Education --- Experiments --- Food and Beverage Industry --- Industrial Management --- Industry --- Knowledge for Development --- Labor and Social Protections --- Labor Policies --- Machinery --- Macroeconomics and Economic Growth --- Market competition --- Markets and Market Access --- Monopoly --- Paper industry --- Private Sector Development --- Product market --- R&D --- R&D expenditures --- Research working papers --- Researchers --- Retail --- Science and Technology Innovation --- Science Education --- Scientific Research and Science Parks --- Simulation --- Substitutes --- Supplier --- Techniques --- Textile industry --- Turnover --- Water and Industry --- Water Resources --- Weighting