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

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  • Gene M. Grossman

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1174.

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Date of creation: Aug 1983
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Publication status: published as Grossman, Gene M. "International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class." American Economic Review, Vol. 74, No. 4, (September 1984), pp. 605-614.
Handle: RePEc:nbr:nberwo:1174

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  1. Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 18(2), pages 258-72, May.
  2. Kanbur, S. M., 1981. "Risk taking and taxation : An alternative perspective," Journal of Public Economics, Elsevier, Elsevier, vol. 15(2), pages 163-184, April.
  3. Baldwin, Robert E, 1969. "The Case against Infant-Industry Tariff Protection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(3), pages 295-305, May/June.
  4. 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, University of Chicago Press, vol. 87(4), pages 719-48, August.
  5. Stiglitz, Joseph E, 1969. "Behavior Towards Risk with Many Commodities," Econometrica, Econometric Society, Econometric Society, vol. 37(4), pages 660-67, October.
  6. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  7. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 769-97, August.
  8. 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.
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Cited by:
  1. Maliranta, Mika & Nurmi, Satu, 2004. "Do Foreign Players Change the Nature of the Game Among Local Entrepreneurs?," Discussion Papers, The Research Institute of the Finnish Economy 942, The Research Institute of the Finnish Economy.
  2. Black, Jane & de Meza, David, 1997. "Everyone may benefit from subsidising entry to risky occupations," Journal of Public Economics, Elsevier, Elsevier, vol. 66(3), pages 409-424, December.
  3. Laura Alfaro & Andrew Charlton, 2006. "International Financial Integration and Entrepreneurship," CEP Discussion Papers, Centre for Economic Performance, LSE dp0755, Centre for Economic Performance, LSE.
  4. Schmitt, Nicolas & Soubeyran, Antoine, 2006. "A simple model of brain circulation," Journal of International Economics, Elsevier, Elsevier, vol. 69(2), pages 296-309, July.
  5. 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, Institute of Prospective Technological Studies, Joint Research Centre 2013-03, Institute of Prospective Technological Studies, Joint Research Centre.
  6. 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.
  7. Seiichi Katayama & Sajal Lahiri & Eiichi Tomiura, 2005. "Cost Heterogeneity and the Destination of Foreign Direct Investment," Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University 166, Research Institute for Economics & Business Administration, Kobe University.
  8. Sahana Roy Chowdhury, 2013. "Wealth inequality, entrepreneurship and industrialization," Journal of Economics, Springer, Springer, vol. 108(1), pages 81-102, January.
  9. Hoff, Karla, 1997. "Bayesian learning in an infant industry model," Journal of International Economics, Elsevier, Elsevier, vol. 43(3-4), pages 409-436, November.
  10. Das, Satya P., 2002. "Foreign direct investment and the relative wage in a developing economy," Journal of Development Economics, Elsevier, Elsevier, vol. 67(1), pages 55-77, February.
  11. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers, University of Oxford, Department of Economics 99125, University of Oxford, Department of Economics.
  12. Laura Alfaro & Andrew Charlton, 2007. "International Financial Integration and Entrepreneurial Firm Activity," NBER Working Papers 13118, National Bureau of Economic Research, Inc.
  13. 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, Elsevier, vol. 66(10), pages 2090-2101.
  14. Koen de Backer, 2002. "Does foreign direct investment crowd out domestic entrepreneurship?," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 618, Department of Economics and Business, Universitat Pompeu Fabra.
  15. 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.
  16. David Blanchflower & B Meyer, 1991. "A Longitudinal Analysis of Young Entrepreneurs in Australia and the United States," CEP Discussion Papers, Centre for Economic Performance, LSE dp0055, Centre for Economic Performance, LSE.
  17. Sanjay Banerji & Ngo Van Long, 2001. "Wealth Distribution, Entrepreneurship and Intertemporal Trade," CIRANO Working Papers, CIRANO 2001s-36, CIRANO.
  18. 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.
  19. 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, Verein für Socialpolitik / German Economic Association 80020, Verein für Socialpolitik / German Economic Association.

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