Working Paper: NBER ID: w1174
Authors: 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.
Keywords: International Trade; Foreign Investment; Entrepreneurship; Economic Development
JEL Codes: F1; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Free Trade (F19) | Smaller Entrepreneurial Class (L26) |
| Free Trade (F19) | Decline in Return to Entrepreneurship (L26) |
| Foreign Direct Investment (F21) | Crowding Out of Local Entrepreneurship (L26) |
| Foreign Direct Investment (F21) | Decline in National Income (H69) |
| Protectionist Policies (F13) | Increase in Pool of Domestic Entrepreneurs (L26) |
| Protectionist Policies (F13) | Negative Welfare Consequences (I38) |