Endogenous Growth Theory
Endogenous growth theory posits that intense growth within a growing economy will encourage entrepreneurs to invent and invest in new technological innovations which will, in turn, enhance productivity and overall economic growth. Because international trade increases competition, endogenous growth theory suggests that trade will magnify the long-term growth of national economies. Trade also expands the potential market of domestic producers and allows local firms to access superior technologies and other resources from foreign markets, which contributes to the increase of domestic competition and productivity.
Endogenous growth theory assumes that countries trading with one another will be similarly equipped with capital and technological capabilities. There is some doubt, therefore, whether developing nations who trade with wealthier industrialized nations will benefit from the same pressures and opportunities to innovate that trade offers to industrialized nations. As Grieco and Ikenberry affirm, “economists central to endogenous growth theory have noted that if the products in which developing countries are prompted to specialize as a result of trade are not associated with substantial opportunities for technical improvements, then trade might not contribute very much to the rate of technological advance it those countries”. If a developing country has a Comparative Advantage in technology-heavy manufacturing, then international trade, according to the theory, will probably spur the firms and entrepreneurs in that country to innovate and thus ultimately lead to greater long-term growth. If, however, a developing country is encouraged to specialize in technologically-light agriculture for instance, then increased trade will probably not confer the benefits of increased capital and competition that would lead to innovation and growth. Endogenous growth theory thus shows free trade to be particularly advantageous to industrialized nations, but it is somewhat limited in demonstrating the benefit of trade to development.
- Grieco, Joseph M. and G. John Ikenberry. State Power and World Markets: The International Political Economy. New York, NY: W. W. Norton & Company, Inc., 2003. Chapter 2. Pg.51