Academic journal article Journal of Business Economics and Management

The Effects of Autocatalytic Trade Cycles on Economic Growth

Academic journal article Journal of Business Economics and Management

The Effects of Autocatalytic Trade Cycles on Economic Growth

Article excerpt

Introduction

Innovation is essential to technological-knowledge progress, which, in turn, is an engine of economic growth (Gil et al. 2013.). Hence, most countries should be interested in ways to improve their technological-knowledge competence.

The causes for innovation are often best reviewed in a competitive framework: entities, such as governments and firms, that innovate, are expected to fare better than ones which do not innovate (Werker 2003). However, this may not be the only reason to innovate: Cassell (2008) found that their decision to innovate was dependent on more factors than simply to save costs.

A traditional way of innovating is through research and development (R&D) efforts. Empirical evidence of this growth mechanism has been shown in, for example, Lichtenberg (1993) and Coe and Helpman (1995). At the theoretical level, the first-generation of comprehensive, well articulated general equilibrium growth models based on R&D that seek to explore the role of technological knowledge change in the economic growth process, are centred on two types of R&D processes--horizontal and vertical.

In the first one, R&D is directed at developing new horizontally differentiated goods, an approach followed in prominent works by Romer (1986, 1990), Rivera-Batiz and Romer (1991), Grossman and Helpman (1991) and Barro and Sala-i-Martin (2004). Since there are no quality advances, no good ever becomes obsolete. Firms that become producers remain leaders from then on without further R&D effort, since they are granted a patent that lasts forever.

In the vertical process, R&D is instead directed at developing new vertically differentiated qualities of each good, an approach that was first developed by Segerstrom et al. (1990), Grossman and Helpman (1991), and Aghion and Howitt (1992). The resulting models are called Schumpeterian (inspired by the Schumpeterian concept of creative destruction), or quality ladder models, since, assuming that the leadership of the firms that use the state-of-the-art qualities is only temporary--permanently subject to destruction by new qualities resulting from successful R&D.

Hence, when integrated in endogenous growth models, R&D activities--either horizontal or vertical--result in technological-knowledge progress, which, in turn, is the primary determinant of growth. Two major characteristics of technological knowledge are essential for its role as an endogenous engine of growth--non-rivalry and partial non-excludability. Technological knowledge is non-rival in the sense that the marginal costs for its use by an additional firm are negligible; and it is partially non-excludable since the returns to private investment in its production are partly private and partly public. As a result, the total return on innovation for the society as a whole (the social return) is greater than the private return.

As a result, in general, it is considered decreasing returns to R&D (e.g. Ha, Howitt 2007). The phenomenon of decreasing returns to R&D means that innovating becomes more and more costly as measured in R&D costs per increase in quality of goods or decrease in factor inputs. This is often caused by the exhaustion of technological paradigms that the R&D effort has taken place in so far (e.g. Dosi 1982). However, Madsen (2007) has suggested that decreasing returns to R&D cannot always be easily found.

To overcome this problem a new technological paradigm needs to be found. In fact, one needs to innovate more radically. Here, radical innovation is not limited to a particular good or service strictly deviating from the path it has taken so far, being defined as deviating enough to start improving a good at a reasonable R&D efficiency again. This kind of innovation is distinct from the incremental type, which does not involve new paradigms--e.g. Dosi (1982) and Freeman (1991).

For countries that are not leaders (some developed and developing countries), the first major way of overcoming the problem of decreasing returns to R&D is by imitating innovations from leaders. …

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