Trade-Induced Investment-Led Growth

Abstract:     
This paper presents five theoretical openness-and-growth links that can account for trade-induced investment-led growth. The links are all demonstrated with neoclassical growth models developed in the context of trade models that allow for imperfect competition and scale economies. This sort of old-growth-theory-in-a-new-trade model has not been thoroughly explored in the literature since the profession skipped from old-growth-old-trade models straight to new- growth-new-trade models. Nonetheless, such models are necessary to explain several key aspects of the econometric evidence on trade and growth. For example, cross-country data suggests that openness influences growth only via its effect on investment and suggests that openness promotes investment in all countries, whatever the capital-intensiveness of their exports (contrary to predictions of the old-growth-old-trade models).

JEL Classification: F12, F43

working papers series