The Importance of Capital Formation and Technological Change

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From the course by University of California, Irvine

Strategic Business Management - Macroeconomics

13 ratings

University of California, Irvine

Strategic Business Management - Macroeconomics

13 ratings

This course weds business strategy with the principles of macroeconomics. It offers valuable a powerful toolbox together with cases and lessons across all major functions of business, management, from finance, operations management, and marketing to human resource management, organizational behavior, statistics, and, of course, business strategy.

From the lesson

Growth in the Developed and Developing Worlds

Overview of the Four Wheels of Growth7:01

The Four Wheels of Growth in Detail7:21

The Classical Growth Models of Adam Smith and Thomas Malthus9:23

The Neoclassical Growth Model and Importance of Technological Change12:13

Growth in Developing Nations4:38

The Quantity and Quality of Human Resources6:37

The Blessing and Sometimes Curse of Natural Resources6:02

The Importance of Capital Formation and Technological Change5:14

Development Strategies To Break The Vicious Cycle of Poverty6:40

Meet the Instructors

Dr. Peter Navarro
Professor
Paul Merage School of Business

[MUSIC]

How do you get the poor people of a poor country that consume even less and

save even more, so that poor country can invest more and

thereby achieve a higher rate of capital formation and

technological change and lift that country out of poverty.

That is the exact conundrum and dilemma many poor nations of the world face today.

Here, it must be said purely as a statistical matter

that the role of capital formation in economic growth cannot be understated.

Consider that country leaders in the growth race invest

at least 20% of their output in capital formation.

By contrast, the poorest agrarian countries are often able to save and

invest only about 5% of their national income.

Moreover, much of the low level of savings that actually winds up in the capital

formation process goes to providing the growing population with basic housing and

simple tools, while there is little left over for

more sophisticated technological development.

The result in far too many poor countries is too little investment

in the productive capital so indispensable for rapid economic progress.

But here's some good news.

These low levels of investment and

slow rates of capital formation do not necessarily mean these

poor countries will be denied the fruits of technological change.

[MUSIC]

Here is indeed some good news for developing countries, when it comes

to the important element of technological change in the development process.

In today's world, poor countries don't have to be inventive and innovative.

Instead, they can simply import advanced technologies

from the more advanced nations.

In fact, the development histories of two of the world's largest economies,

those of the United States and China,

clearly illustrate this pattern of leveraging technological change to

bootstrap one's country into the upper echelons of development.

[MUSIC]

In the case of the United States,

the development of its auto industry during the early to mid 20th

century provided a tremendous boost to America's economic growth.

But here's the interesting plot twist.

Many of the key inventions involved in producing automobiles originated

almost exclusively from what was then more advanced nations abroad.

Nevertheless, Ford and General Motors applied these foreign inventions and

built huge assembly lines and rapidly became the world leaders in

the automotive industry, thereby, leapfrogging the rest of the world.

[MUSIC]

As for the People's Republic of China, this communist nation

was founded in 1949 after a peasant revolution, but

remained an nation, largely closed to the world until 1979.

That's when one of China's leaders, Deng Xiaoping,

initiated China's second economic revolution.

A key feature of this revolution has been the purchase, reverse engineering, and

often outright theft of highly advanced foreign technologies and

processes for use in Chinese factories.

For China, the result has been historically rapid growth rates propelled

by technological change,

that have lifted hundreds of millions of Chinese citizens out of poverty.

Many foreign countries however, their experience with China

has been a cautionary tale about the need to protect one's intellectual

property in countries where there may be little or no effective protection for

intellectual property like patents, blueprints, designs and trade secrets.

To frame this as a key point, as a business executive, be very careful

to introduce safeguards to protect your company's intellectual property and

trade secrets when venturing into foreign lands.

And even if you keep your production and

intellectual property in your own country, be sure to safeguard against

cyber attacks from foreign shores aimed at taking your intellectual property.

And with those words of wisdom, let's take a quick break.

And when you are ready, it's on to the final module of this lesson and a quick

look at some of the most important and useful development strategies available.

[MUSIC].

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