Endogenous Growth Theory – Definition

Cite this article as:"Endogenous Growth Theory – Definition," in The Business Professor, updated November 30, 2018, last accessed October 27, 2020, https://thebusinessprofessor.com/lesson/endogenous-growth-theory/.


Endogenous Growth Theory Definition

The endogenous theory is a financial theory which argues that financial or economic growth is generated from internal (rather than external) procedures and inputs. The theory notes that productivity can be improved by the efficiency of a skilled labor force and by rightly using technology.

A Little More on What is the Endogenous Growth Theory

The Endogenous growth theory contrasts with neoclassical economic theory, which contends that technological development and other external elements are the primary sources of monetary and economic growth. Most notably, endogenous growth economists believe that improvements in productivity can be tied directly to faster innovation and greater investments in human capital. They focus upon the effects of providing better training methods, research and development, and more innovative ways of production. So, if the firm wants to achieve sustainable growth, it would need to invest in endogenous inputs, such as human capital, research, innovative technologies, and other endogenous factors.

Factors Connected to Endogenous Economic Growth

Many factors needed for endogenous growth come from public and private sector contribution to production environment.

  • The government has the ability to raise a country‚Äôs economic growth rate. The authorities can do it by forming and encouraging more competitive markets which leads to more productivity and generate healthy competition among enterprises.
  • Capital investment in infrastructure and investment in schooling and fitness and telecommunications.
  • Non-public, regional investment in research & improvement is a key supply of technological progress.
  • Property rights (such as patents) are essential to supplying incentives for corporations and marketers to engage in studies and improvement.
  • Funding in human capital is a crucial factor of growth.
  • Government spending to inspire entrepreneurship as a method of creating new companies and ultimately as an important supply of recent jobs, investment, and further innovation.

References for Endogenous Growth Theory

Academic Research on Endogenous growth theory

‚󏬆¬†¬†¬†¬† Endogenous growth theory: intellectual appeal and empirical shortcomings, Pack, H. (1994).¬†Journal of Economic Perspectives,¬†8(1), 55-72. This paper examines whether the recent theoretical insights stemming from endogenous growth theory have provided a better guide to explaining actual growth experience than the neoclassical model. The paper considers the available empirical evidence on a number of related subjects, including the slowing of growth in the OECD countries over the last two decades. It concludes that the empirical confirmation, so far, of endogenous growth theory is limited.

‚󏬆¬†¬†¬†¬† Slow convergence? The new¬†endogenous growth theory¬†and regional development, Martin, R., & Sunley, P. (1998). Economic geography,¬†74(3), 201-227. This paper analyses the concept of interest in economic growth. It analyses the use of long term regional patterns by economist in developing the endogenous growth theory. Results suggest that regional convergence is a slow and discontinuous process in economic growth. The author wishes to show whether endogenous growth theory can help to explain this finding.

‚󏬆¬†¬†¬†¬† Accounting for Trends in Productivity and R&D: a schumpeterian critique of semi‚Äźendogenous growth theory, Ha, J., & Howitt, P. (2007). Journal of Money, Credit and Banking,¬†39(4), 733-774. This paper argues that long‚Äźrun trends in R&D and TFP are more supportive of fully endogenous ‚ÄúSchumpeterian‚ÄĚ growth theory than they are of semi‚Äźendogenous growth theory.

‚󏬆¬†¬†¬†¬† The origins of¬†endogenous growth, Romer, P. M. (1994). Journal of Economic perspectives,¬†8(1), 3-22. This paper describes two strands of work that converged under the heading of ‘endogenous growth.’ The first strand analyses the possibility of poor countries catching up with rich countries, while the second analyses the construction of a theory of aggregate growth that takes the economics of discovery, innovation, and technological change seriously. The paper argues that the second strand of work will ultimately have a more significant impact on our understanding of growth and our approach to aggregate theory.

‚󏬆¬†¬†¬†¬† Policy implications of¬†endogenous growth theory, Shaw, G. K. (1992).¬†The Economic Journal,¬†102(412), 611-621.

‚󏬆¬†¬†¬†¬† Critical survey.¬†Endogenous growth theory: A critical assessment, Fine, B. (2000). Cambridge Journal of Economics,¬†24(2), 245-265. This paper analyses the perspective of the recent developments in the endogenous growth theory as a discipline in economics. The author analyses the mathematical and economic aspect of this development and comes to a conclusion with findings.

‚󏬆¬†¬†¬†¬† Scale effects in¬†endogenous growth theory: An error of aggregation not specification, Laincz, C. A., & Peretto, P. F. (2006). Journal of Economic Growth,¬†11(3), 263-288. This paper focuses on the theme of the modern Schumpeterian growth theory. The empirical core of this theory consists of two claims: (i) growth depends on average employment (i.e., employment per product line); (ii) average employment is scale invariant. The authors show that data on employment, R&D personnel, and the number of establishments in the US for the period 1964‚Äď2001 provide strong support for these claims.


‚󏬆¬†¬†¬†¬† Growth theory¬†in a Keynesian mode: some Keynesian foundations for new¬†endogenous growth theory, Palley, T. I. (1996). Journal of Post Keynesian Economics,¬†19(1), 113-135. This paper shows how endogenous growth theory can be modified to incorporate Keynesian aggregate demand theoretic foundations.


‚󏬆¬†¬†¬†¬† Steady¬†endogenous growth¬†with population and r. & d. inputs growing, Howitt, P. (1999).¬†Journal of Political Economy,¬†107(4), 715-730. This paper presents a Schumpeterian endogenous growth model in which a steady state exists with a constant growth rate even though population and the inputs to R. & D. are growing.

‚󏬆¬†¬†¬†¬† ‘Post-neoclassical¬†endogenous growth theory‘: what are its policy implications?, Crafts, N. (1996).¬†Oxford Review of Economic Policy,¬†12(2), 30-47. Ideas from new growth economics are considered in the context of British economic policy. A distinction is drawn between “broad capital” and “endogenous innovation” growth models and the latter are seen as more helpful. This paper analyses the different implications and suggestions of the new policies.

‚󏬆¬†¬†¬†¬† The contributions of¬†endogenous growth theory¬†to the analysis of development problems: an assessment, Bardhan, P. (1995). Handbook of development economics,¬†3, 2983-2998. This paper explores the impact of the growth theory on economic development. The chapter discusses the major impact of this literature on development theory had it been in the area of trade and technological diffusion in an international economy.

‚󏬆¬†¬†¬†¬† East Asian experience and¬†endogenous growth theory, Krueger, A. O. (1995). In¬†Growth Theories in Light of the East Asian Experience, NBER-EASE Volume 4¬†(pp. 9-36). University of Chicago Press. In this paper, the East Asian experience is reviewed with respect to the salient characteristics of growth and to the current state of understanding of that experience, drawing largely on accumulated research and analysis.

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