The idea of the exogenous growth developed out of the neoclassical growth model. The exogenous growth model takes into consideration aspects such as production and technological variables as determinants of growth. On its part, the endogenous growth model is based on the principle that forces the capital investment and the working class is necessary to spur economic growth. The endogenous model points out that the economy will continue to grow just by the use of the available resources.
In the neo-classical development model, the long-run level of growth is exogenously guided by both the savings level and the level of technical growth. Nevertheless, the level of technological advancement is not yet understood. The endogenous growth theory was developed to offer a better explanation by developing macroeconomic forms out of microeconomic fundamentals. In most cases, families are considered to take full advantage of budget deficits while companies maximize gains. Big significance is accorded to the developing of new technology and human resources. The means of growth can be as plain as a stable return to scale production function or more intricate mechanisms with overflow effects that leads to the rise in goods and an increase in quality (Ludvigson, Ma & Ng, 2018).
In most cases, the endogenous growth theory has a invariable marginal product of capital of capital at the cumulative level. It also turns out that the level of the marginal product of capital does not decline towards the zero mark. This is not a gesture to indicate that large corporations are more likely to be productive as compared to their smaller counterparts. This is because the marginal product of capital is still decreasing at the organizational level. However, a large section of endogenous growth models have less stringent sense of perfect competition and such organizations enjoy a level of power monopoly. The monopoly in power often comes from the holding of patents. Such big organizations often have two sectors i.e. production unit and R&D. the function of the R&D unit is to come up with ideas that ensure such firms become monopolies. R&D organizations are thought to be capable of making monopoly gains by marketing their ideas to other organizations. However, the concept of free entry means that the assumed gains are utilized on R&D (Bal & Nijkamp, 2012).
The implication of contemporary growth theory is that strategies that encourage ingenuousness, opposition, transformation, and invention will encourage growth. On the other hand, policies that have the capability of hampering or slowing transformation by preferring certain organizations to others are more prone to minimize growth to the detriment of the community. This implies that while an organization can in place all the right mechanisms in place in as far as the endogenous and exogenous growth theory is concerned, the government plays a very crucial role in determining the success or failure of an organization. Governments should therefore come up with measures that are meant to promote and not derail the success of an organization (Ludvigson, Ma & Ng, 2018).
For there to be sustained financial growth, there is need for an organization to keep on transforming. In most cases, organizational growth is driven by diverse market drivers and as such, there is need for the organizations to take into consideration various strategies that are likely to drive growth in the long-term. It is also important to understand that the government plays a central role in ensuring the success of any organization. This is because government policies can have either negative or positive effects on the organization. The nature of economic growth that developed countries have enjoyed since the Industrial Revolution could not have been possible if there were no moments of painful changes. Organizations and nations that stop changing themselves are prone to falling off the ladder of economic growth. Growth and development are not only a process but they need wealth to be sustained.
- Bal, F., & Nijkamp, P. (2012). Exogenous and Endogenous Spatial Growth Models. Retrieved from https://research.vu.nl/ws/portalfiles/portal/2202337/12393.pdf
- Ludvigson, S., Ma, S., & Ng, S. (2018). Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? The National Bureau of Economic Research.