International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class
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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aggregate agricultural output allocation of risk associated with industrial autarchy autarky Author Title Date bears the risks Bureau of Economic commodity comparative advantage direct foreign investment distortion domestic entrepreneurs Economic Research effects equilibrium expected utility first-best allocation first-best optimal foreign enterprises foreign firms foreign-owned free international trade gains from trade implies import the industrial-sector indirect utility function individuals industrial enterprise industrial output inflow of foreign inhibits the formation Kanbur landlords LDC economy less developed country less developed economies Macroeconomic Massachusetts Avenue model of entrepreneurship National Bureau NBER WORKING PAPER non-landlord population Number Author Title number of entrepreneurs occupational choice occupational-choice decision PENNSYLVANIA STATE UNIVERSITY policy instruments potential gains profits proportional income taxes Protectionist random variable relative price risk aversion risk-bearing Rosen sector small economy small open economy social classes stock markets supply of entrepreneurs tariffs tax on agricultural taxes and subsidies trade policy two-sector model uncertainty welfare levels z-good