Revista Brasileira de Inovação ISSN 2178-2822 DOI: https://doi.org/10.20396/rbi.v19i0.8654621 ARTICLE Aggregate growth models from a Schumpeterian perspective: a review João P. Romero* 1 * Universidade Federal de Minas Gerais (UFMG), Belo Horizonte, MG, Brasil E-mail: [email protected] Received: 11 February 2019 Revised version: 12 September 2019 Accepted: 02 February 2020 Abstract The paper presents a critical assessment of the Schumpeterian macroeconomic approach to economic growth. Taking as reference a representative sample of important works within this tradition, the paper identifies the main contributions and limitations of the macroeconomic Schumpeterian literature to understanding economic growth. More specifically, the literature review carried out in this paper focuses on three of Schumpeter’s ideas that have become particularly influential in macroeconomic growth theory: (i) the role of technological transfer in productivity growth in follower countries; (ii) the importance of research intensity for technical progress; and (iii) the prominence of technological competitiveness for trade performance. The contribution of the paper is twofold: (i) it provides an organized review of the macroeconomic literature until its present state; and (ii) it indicates important gaps in this literature that should be the focus of further research. Keywords | Technical progress; Economic growth; Technological transfer; International trade; Technological competitiveness 1 The autor is member of Centro de Desenvolvimento e Planejamento Regional (Cedeplar) from Universidade Federal de Minas Gerais (UFMG). AT Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 1 João P. Romero 1. Introduction The Austrian economist Joseph Schumpeter is known for his seminal works on the importance of innovation for economic growth. His contributions range from the classification of different types of innovation to the analysis of the determinants of innovation, the importance of finance for technical progress, the role of technological competitiveness in trade performance, and the role of imitation and technological transfer in economic growth (see FAGERBERG, 2005). Schumpeter’s (1934, 2003 [1943]) works have inspired research from different perspectives. On the one hand, Nelson and Winter (1982), Dosi (1982), Metcalfe (2005) and others have explored Schumpeter’s ideas using an evolutionary framework. This approach, which seeks to follow more closely the ideas of Schumpeter, highlights the importance of disequilibria generated by innovations to foster the process of economic development. Studies from this tradition have used agent-based models (ABM) to analyse the process of economic development, in which heterogeneous actors with bounded rationality interact to form economic systems. On the other hand, Romer (1990), Grossman and Helpman (1991), Aghion and Howitt (1992, 1998, 2009), Acemoglu, Aghion and Zilibotti (2006) and others have explored Schumpeter’s ideas using growth models with endogenous technical progress. In this approach, some of Schumpeter’s key insights were incorporated into the neoclassical framework to cope with the clear limitations of the basic Solow (1956) growth model and try to get to a more specific answer to the factors that determine long term growth and technical progress. In spite of the sharp differences in the microeconomic foundations between the different Schumpeterian traditions, the aggregate macroeconomic application of Schumpeter’s insights is considerably similar among them (see VERSPAGEN, 2005). The present paper focuses on these aggregate models and empirical works that seek to represent some of Schumpeter’s key insights. In terms of the macroeconomic analysis of the determinants of innovation and growth, authors from both streams emphasise the importance of technological transfer (e.g. GRIFFITH; REDDING; VAN REENEN, 2004; VERSPAGEN, 1991), finance (e.g. LEVINE; LOAYZA; BACK, 2000; FAGERBERG; SRHOLEC, 2008), research and development (R&D) (e.g. MADSEN, 2008A; COHEN; LEVINTHAL, 1990; FAGERBERG; SRHOLEC; KNELL, 2007; ARCHIBUGI; COCO, 2005), technological competitiveness (e.g. FAGERBERG, 1988; ANG; MADSEN; ROBERTSON, 2015), and institutions 2 Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 3 Aggregate growth models from a Schumpeterian perspective: a review (e.g. ACEMOLGU; AGHION; ZILIBOTTI, 2006; AGHION; HOWITT, 2009; LUNDVAL, 1992; NELSON, 1993; METCALFE; RAMLOGAN, 2008). The objective of this paper is to present a critical assessment of the Schumpeterian macroeconomic approach to economic growth. Taking as reference a representative sample of important works within this tradition, this paper aims to identify the main contributions and limitations of the Schumpeterian literature to understanding economic growth. More specifically, the literature review carried out in this paper focuses on three of Schumpeter’s (1934; 2003 [1943]) ideas that have become particularly influential in macroeconomic growth theory: (i) the role of technological transfer in productivity growth in follower countries; (ii) the importance of research intensity for technical progress in leading economies; and (iii) the prominence of technological competitiveness for trade performance. The main contribution of this paper, therefore, is to identify the gaps in the existing macroeconomic Schumpeterian analyses of economic growth, through a thorough revision of the relevant literature. Thus, this paper contributes to facilitate and guide future works that aim to develop and improve the aggregate Schumpeterian approach to long-term growth. It is important to highlight, however, that the Schumpeterian literature is vast and diverse. Hence, this paper does not seek to provide an exhaustive review, but aims to use some important studies as reference to point out some relevant gaps in the literature. An additional contribution of the paper is to highlight the similarities of the aggregate Schumpeterian approaches in different research areas, despite the marked differences in the micro-foundation across different Schumpeterian traditions. The remainder of the paper is divided in four sections. Section 2 discusses the importance of research intensity for technological progress within the Schumpeterian tradition. Section 3 discusses the foundations of the Schumpeterian approach to technological transfer. Section 4 analyses the role of technological competitiveness in trade performance from a Schumpeterian standpoint. Section 5 presents the paper’s concluding remarks. 2. Research intensity and long-term growth According to Schumpeter (2003 [1943]), product differentiation (i.e. innovation) gives rise to temporary monopolies, which guarantee abnormal profits to innovators. This creates an incentive for firms to invest in research and development (R&D) in pursuit of innovations. This seminal idea represents the foundation of Schumpeterian 2 Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 3 João P. Romero models of economic growth (VALDÉS, 1999). Evidently, other contributions from Schumpeter’s (1934; 2003 [1943]) works were also explored in the literature that investigates the determinants of economic growth (e.g. AGHION; HOWITT, 1992; KING; LEVINE, 1993). Still, the importance of R&D, innovation and temporary monopolies (i.e. partial-excludability of innovations – ROMER, 1990) for technical progress and economic growth are the main ideas that characterize Schumpeterian macroeconomic growth models. In contrast with the seminal endogenous growth models developed by Arrow (1962) and Frankel (1962), where technological progress is an unintentional spillover of capital accumulation, in the Schumpeterian growth model, technology is intentionally accumulated. The Schumpeterian growth model divides the economy into two sectors, a final output sector and a research sector. The research sector uses a fraction of the labour force ( ) and the existing stock of technical knowledge to produce new technology, while the final goods sector uses the other fraction of the labour force ( ) and capital to produce final output. Thus, the model can be described using a production function and a technology progress function, respectively:2 (1) (2) where Y is the level of output, K is the capital stock, is labour, A is the level of technology, α is the share of capital in output, is the rate of technical progress, ϕ is the degree of returns to scale in knowledge, β is a coefficient of product proliferation, σ is the coefficient of research duplication, and δ reflects research efficiency.3 The defining characteristics of the Schumpeterian growth model are expressed in the parameters of the technology progress function given by equation (2). First, the coefficient of product proliferation is assumed to be equal to one, i.e. β = 1. Following Young (1998), this means that in a larger economy the number of firms that can create similar products is also larger, which results in more horizontal 2 The term technology progress function used here should not be confused with Kaldor’s (1957) technical progress function, which is expressed in a different form and is used to avoid separating movements along the production function from movements of the production function 3 See Ha and Howitt (2007). 4 Rev. Bras. Inov., Campinas (SP), 19, e020004, p. 1-30, 2020 Rev. Bras.