by Grossman, Gene M.
Traditional growth theory emphasizes the incentives for capital accumulation rather than technological progress; innovation is treated as an exogenous process or a by-product of investment in machinery and equipment. Grossman and Helpman develop an approach in which innovation is viewed as a deliberate outgrowth of investments in industrial research by forward looking, profit-seeking agents. They also devote attention to the place of international trade in the growth process, including the transmission of innovations from the industrial economies to the IDCs. Grossman and Helpman provide an overview of recent analyses of innovation and growth, expanding the available formal theory in a number of ways. They develop straightforward theoretical models that treat innovation as the outgrowth of costly investments in industrial competitive conditions in national and international product markets. Since firms in different countries race to bring out new products, growth processes are linked by international technological competition. An important aspect of Grossman and Helpman's study, is that they focus on the growth process of a country that operates in a global economy. They allow comparative advantage to be created endogenously in the industrial research laboratory but look at the dynamic determinants in the pattern of trade and the interactions between trade and growth. One chapter is devoted entirely to how economic integration affects a country's innovation and growth, while another studies the effects of national policies in an international environment. The final two chapters take up interaction between the processes of innovation in the industrialized North and imitation in the middle income South.