What Is Exogenous Growth?

Exogenous growth is a type of theory or belief that growth occurring within an economy is influenced by what is happening outside that economy. The same general concept can be applied to an individual company, with the understanding that factors outside the direct control of that company will have some influence on the economic growth that is experienced by that company. The general idea of exogenous growth was developed during the middle of the 20th century, and takes into consideration the basics of the Neoclassical Growth Theory while expanding the concept to allow for events and scenarios relevant to economic growth in a contemporary setting.

The general concept of exogenous growth is contrasted with another economic theory that is known as the endogenous growth theory. While the former focuses on the idea that external factors impact the rate of growth within an economy, the latter holds to the understanding that it is internal factors that primarily influence what type of growth is experienced within an economy. Both theories allow for the potential of what is known as uneconomic growth, meaning that an economy may experience a period of time in which no positive growth actually occurs.

A number of factors are considered as part of the theory of exogenous growth. Attention is paid to all types of production factors, including labor and shifts or innovations in technology that may occur, the securing of raw materials that are used in the production process, and even the supply and demand generated for the goods produced. Even factors such as government incentives in the form of tax cuts will be accounted for, as well as any government actions that may have an adverse effect on the production process itself.

Some factors are viewed as having a short-term impact on exogenous growth, such as temporary tax incentives that may apply for only a year or so. Other factors, such as technological changes, may be thought of as being external factors that have a long-term impact on the amount of economic growth that is experienced within a nation or even within an industry or individual company. The degree to which the idea of exogenous growth may be applied to a particular economic situation is an issue that is still debated by proponents of different economic theories, especially those who see external factors as having some impact on an economy but not serving as the primary influence for the direction of that economy.