Economic Growth - Endogenous Growth Theory
- A Level
- AQA, Edexcel, OCR, IB
Last updated 22 Mar 2021
Endogenous growth economists believe that improvements in productivity can be linked directly to a faster pace of innovation plus investment in human capital.
- They stress the need for strong government and private sector institutions to nurture innovation, and provide incentives for individuals and businesses to be inventive.
- Knowledge industries - typically they are in telecommunications, software or biotechnology - are becoming hugely important in many developed and developing countries.
The main points of the endogenous growth theory are as follows:
- Government policies can raise a country’s growth rate if they lead to more intense competition in markets and help to stimulate product and process innovation
- There are increasing returns to scale from capital investment especially in infrastructure and investment in education and health and telecommunications. A recent report from the World Bank found that, for low and middle income countries every 10% increase in broadband accelerated GDP growth by 1.38%.
- Private sector investment in research & development is a key source of technical progress
- The protection of property rights and patents is essential in providing incentives for businesses and entrepreneurs to engage in research and development
- Investment in human capital (the quality of the labour force) is a key ingredient of growth
- Government policy should encourage entrepreneurship as a means of creating new businesses and ultimately as an important source of new jobs, investment and innovation