Neoclassical theory of economic development and technological innovation

Well-known economists like Edwin Mansfield and Bill Cork, through the in-depth study of technological change, diffusion, and transfer, have promoted Schumpeter’s innovation ideas; formed a unique technology innovation theory; and created Technological Innovation Economics, which argues that “technological progress and innovation is the decisive factor in economic growth”. However, with regards to whether the “technical factor” is the exogenous factor or endogenous factor in the Economic Growth Model, there are disputes which form two theoretical sub-schools: namely the Neoclassical school and the new growth (endogenous growth) school. The Neoclassical Growth theorists, represented by Robert Solow and others, believe that sustainable economic growth cannot be achieved without external push; instead, it can only be realized when the “exogenous” technological progress or population growth is achieved. They are challenged by famous economists such as Kenneth Arrow and Paul Michael Romer, who are considered the representatives of the Endogenous Growth Theory. Endogenous Growth theorists argue that technological progress should be seen as endogenous variables determined by the economic system and that endogenous technological progress is the decisive factor in achieving sustained economic growth.

The theory of scientific and technological innovation proposed by the Neoclassical school is based on the assumption of market failure as a prerequisite and considers technological innovation as a basic factor in the process of economic growth. The neoclassical theory of technological innovation can be divided into the Exogenous Growth Theory proposed by Solow and the Endogenous Growth Theory proposed by Arrow and Romer. The former regards technological innovation as an exogenous factor, focusing on the contribution rate of technological innovation to economic growth, while the latter takes technological innovation as an endogenous factor and integrates it into the mainstream economic model.

The prerequisite and assumptions about market failure

British Technology Innovation Economist R. Kum and others pointed out that the field in which most people who engage in science and technology work is actually made up of multiple areas that are highly controlled and planned. In the enterprises, science and technology research depends on cost, profit, and growth goals; basic research funding in research institutes also determines the direction of technological development, and the country will plan and control some areas of development out of national development strategy and security. Therefore, scientific and technological improvement and technological innovation are not “automatic” but contain rational “independent” elements. The Neoclassical school believes that the rationality for the government to intervene in scientific and technological innovation is that in the process of technological innovation, there is market failure. Arrow believes that the root cause of the failure of market mechanism in the process of technological innovation lies in the non-exclusive nature of the innovation income (the characteristics of public goods of research and development information) in the process of technological innovation, the indivisibility of the innovation process (the basic requirements of innovation investment and limit of the scale of enterprises and their capacity), and the uncertainty of innovation. The market itself cannot solve the problems of risk and the power of innovation. It also cannot create an external environment that is favorable for innovation. Therefore, it is necessary for the government to correct the market failure. The direction and manner of funding, the amount of investment, and the types of innovative enterprises funded by the government will directly affect the efficiency and effectiveness of government policy support.

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