International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class

Gene M. Grossman

NBER Working Paper No. 1174 (Also Reprint No. r0539)
Issued in October 1984
NBER Program(s):   ITI   IFM

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.

(232 K)

Published: Grossman, Gene M. "International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class." American Economic Review, Vol. 74, No. 4, (September 1984), pp. 605-614.

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