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International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class

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  • Grossman, Gene M

Abstract

In this paper, I examine the argument that free trade may be harmful to less developed countries, because such international competition inhibits the formation of a local entrepreneurial class.I view the entrepreneur as the manager of the industrial enterprise, as well as the agent who bears the risks associated with industrial production. A two-sector model of a small open economy is developed in which the size of the entrepreneurial class is endogenous.It is shown that the entrepreneurial class is smaller under free trade than would be first-best optimal in the presence of efficient risk-sharing institutions such as stock markets. Nonetheless, there are potential gains from trade, and any protectionist policy that increases the number of entrepreneurs will have deleterious welfare consequences.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 74 (1984)
Issue (Month): 4 (September)
Pages: 605-14

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Handle: RePEc:aea:aecrev:v:74:y:1984:i:4:p:605-14

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References

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  1. Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," NBER Working Papers 0797, National Bureau of Economic Research, Inc.
  2. Baldwin, Robert E, 1969. "The Case against Infant-Industry Tariff Protection," Journal of Political Economy, University of Chicago Press, vol. 77(3), pages 295-305, May/June.
  3. Stiglitz, Joseph E, 1969. "Behavior Towards Risk with Many Commodities," Econometrica, Econometric Society, vol. 37(4), pages 660-67, October.
  4. Kanbur, S. M., 1981. "Risk taking and taxation : An alternative perspective," Journal of Public Economics, Elsevier, vol. 15(2), pages 163-184, April.
  5. Grossman, Gene M, 1985. "The Optimal Tariff for a Small Country under International Uncertainty: A Comment," Oxford Economic Papers, Oxford University Press, vol. 37(1), pages 154-58, March.
  6. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 769-97, August.
  7. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  8. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
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Citations

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Cited by:
  1. Hoff, Karla, 1997. "Bayesian learning in an infant industry model," Journal of International Economics, Elsevier, vol. 43(3-4), pages 409-436, November.
  2. Das, Satya P., 2002. "Foreign direct investment and the relative wage in a developing economy," Journal of Development Economics, Elsevier, vol. 67(1), pages 55-77, February.
  3. David Blanchflower & B Meyer, 1991. "A Longitudinal Analysis of Young Entrepreneurs in Australia and the United States," CEP Discussion Papers dp0055, Centre for Economic Performance, LSE.
  4. Thai, Mai Thi Thanh & Turkina, Ekaterina, 2014. "Macro-level determinants of formal entrepreneurship versus informal entrepreneurship," Journal of Business Venturing, Elsevier, vol. 29(4), pages 490-510.
  5. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  6. Jörg Zimmermann & Wolfgang Sofka, 2013. "Knowledge search versus knowledge deployment: How foreignness can be both an asset and a liability for firms," JRC-IPTS Working Papers on Corporate R&D and Innovation 2013-03, Institute of Prospective Technological Studies, Joint Research Centre.
  7. Laura Alfaro & Andrew Charlton, 2007. "International Financial Integration and Entrepreneurial Firm Activity," NBER Working Papers 13118, National Bureau of Economic Research, Inc.
  8. Laura Alfaro & Andrew Charlton, 2006. "International financial integration and entrepreneurship," LSE Research Online Documents on Economics 19796, London School of Economics and Political Science, LSE Library.
  9. Schmitt, Nicolas & Soubeyran, Antoine, 2006. "A simple model of brain circulation," Journal of International Economics, Elsevier, vol. 69(2), pages 296-309, July.
  10. Hartwell, Christopher A., 2011. "All That’s Old is New Again: Capital Controls and the Macroeconomic Determinants of Entrepreneurship in Emerging Markets," MPRA Paper 40257, University Library of Munich, Germany.
  11. Maliranta, Mika & Nurmi, Satu, 2004. "Do Foreign Players Change the Nature of the Game Among Local Entrepreneurs?," Discussion Papers 942, The Research Institute of the Finnish Economy.
  12. Seiichi Katayama & Sajal Lahiri & Eiichi Tomiura, 2005. "Cost Heterogeneity and the Destination of Foreign Direct Investment," Discussion Paper Series 166, Research Institute for Economics & Business Administration, Kobe University.
  13. Koen de Backer, 2002. "Does foreign direct investment crowd out domestic entrepreneurship?," Economics Working Papers 618, Department of Economics and Business, Universitat Pompeu Fabra.
  14. Black, Jane & de Meza, David, 1997. "Everyone may benefit from subsidising entry to risky occupations," Journal of Public Economics, Elsevier, vol. 66(3), pages 409-424, December.
  15. Sanjay Banerji & Ngo Van Long, 2001. "Wealth Distribution, Entrepreneurship and Intertemporal Trade," CIRANO Working Papers 2001s-36, CIRANO.
  16. Kim, Phillip H. & Li, Mingxiang, 2014. "Injecting demand through spillovers: Foreign direct investment, domestic socio-political conditions, and host-country entrepreneurial activity," Journal of Business Venturing, Elsevier, vol. 29(2), pages 210-231.
  17. Schwab, Jakob, 2013. "Throwing the Spanner in the Works: The Mixed Blessing of FDI," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80020, Verein für Socialpolitik / German Economic Association.
  18. Pathak, Saurav & Xavier-Oliveira, Emanuel & Laplume, André O., 2013. "Influence of intellectual property, foreign investment, and technological adoption on technology entrepreneurship," Journal of Business Research, Elsevier, vol. 66(10), pages 2090-2101.
  19. Sahana Roy Chowdhury, 2013. "Wealth inequality, entrepreneurship and industrialization," Journal of Economics, Springer, vol. 108(1), pages 81-102, January.

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