When downstream firms innovate, they often expand the market for upstream inputs. This paper investigates whether these endogenous changes in demand affect innovation incentives and constitute a quantitatively important channel for aggregate economic growth. Using Compustat supply-chain links and financial market reactions to patent grants, I find that a one percentage-point increase in a customer's innovation value generates an additional 0.4 percentage point excess return for its suppliers. These supplier valuation gains predict subsequent increases in both supplier sales and patenting. To understand the role of supply chains in transmitting innovation incentives across firms, I develop and calibrate a multisector endogenous growth model of step-by-step innovation featuring upstream suppliers and downstream customers. Because standard R&D policy designs abstract from these vertical linkages, they fail to internalize the full social return of an innovation. Solving the social planner's problem reveals that a targeted R&D subsidy schedule accounting for induced supply-chain research raises aggregate growth relative to a uniform subsidy.

Which firms drive aggregate productivity growth? We document that firms with high price-earnings ratios tend to see increases in their subsequent earnings relative to sales, which we interpret as rents from ideas (innovation). We construct an endogenous growth model with shocks to firm innovation step-sizes and R&D efficiency and calibrate it to match patterns in the data. The model implies that growth would be much lower, even with the same innovative effort, if firms had the same step sizes. The model can be used to infer expected growth contributions of individual firms (such as members of the Magnificent Seven). We find that the share of growth coming from smaller listed firms substantially exceeds their sales share.