By Dr. Kalim Siddiqui 

This study examines the effect of innovation on economic growth in the developing countries. Dr Kalim Siddiqui’s findings show that innovation significantly promotes growth, mediated by human capital and institutional capacity. Framed within endogenous growth theory and informed by Marxist critiques, the study highlights the importance of social relations, income distribution, and structural constraints, offering insights for policies that strengthen innovation systems and foster inclusive, sustainable development.

I. Introduction

Innovation serves as a primary catalyst for economic growth. Fundamentally, it enhances productivity, allowing more output to be generated from the same inputs. This rise in productivity directly expands the production of goods and services, thereby fuelling broader economic expansion and increases in GDP (Gross Domestic Product) per capita.

For emerging economies, innovation is a vital driver of development. It enhances competitiveness, stimulates job creation, raises incomes and exports, and supports sustainable growth by transforming knowledge into valuable new products, services, and processes. This dynamic of creative destruction replaces outdated methods with more productive alternatives. Countries and firms that innovate effectively strengthen their competitive position in both domestic and global markets, while those that fall behind risk obsolescence and the erosion of market share.

Crucially, innovation extends beyond technological breakthroughs to include “soft” innovations such as new business models or the creative application of existing knowledge. The industries and enterprises that emerge from these innovations generate wealth and diverse employment opportunities, contributing positively to structural change—an essential process for developing countries. Moreover, targeted innovation in key sectors such as agriculture, healthcare, and services can open new economic pathways, lift populations out of poverty, and significantly enhance quality of life. Ultimately, by enabling countries to move up the global value chain and advancing objectives like the UN Sustainable Development Goals (SDGs), innovation provides the foundation for inclusive and sustainable long-term growth.

The process of innovation-driven economic growth is inseparable from the continuous choice of technology. Every country must repeatedly decide which techniques to adopt, which sectors to prioritize, and how to allocate investment in ways that enhance long-run productive capacity. Maurice Dobb’s analysis is rooted in the Soviet Union’s experience of rapid industrialization under comprehensive planning, offers one of the most influential frameworks for understanding these choices in late-developing economies. Dobb argued that the allocation of investment should be guided not by short-term profitability but by a criterion aimed at expanding workers’ productive power. In his view, a development strategy oriented toward social needs rather than market profitability allows an economy to attain higher levels of technological capability and long-term growth (Dobb, 1960).

Amartya Sen later engaged with Dobb’s approach, emphasizing similar principles in his discussions of optimal growth, social choice, and developmental priorities. For both authors, the central task of development policy is to create conditions that maximize the amount of capital available per worker and simultaneously improve the quality of labour through skills, education, and learning capacity. This combination—capital deepening and capability enhancement—forms the basis for sustained productivity growth (Dobb, 1960).

In the post-independence period, the adoption of import-substitution industrialization (ISI) strategies by the underdeveloped economies created fresh demand for technical skills, leading to the establishment of new colleges and training institutions to build a domestic skilled labour force. This strategy, however, encountered a fundamental constraint: low domestic incomes and per capita consumption limited the internal market for newly produced industrial goods. Consequently, these independent countries became reliant on exporting to Western markets to sustain industrial growth. From the 1980s onward, rising external debt crises in the Global South (developing countries) enabled Western governments and international financial institutions to impose neoliberal policies, intensifying this dependency on the Global North (Siddiqui, 2024a).

This dependency on the Global North (developed countries) extends into the realm of technology. The process of scientific and technological development in the Global South remains fundamentally oriented towards learning from and importing innovations from developed countries. Yet, technological advancement in the Global North has increasingly moved towards automation and capital-intensive production, which employs less labour. This trajectory is poorly suited to the abundant labour conditions of the Global South. The adoption of such imported capital-intensive technologies often leads to the displacement of unskilled and semi-skilled workers, exacerbating unemployment and undermining the core developmental goal of expanding productive employment.

In post-war Japan, large corporations frequently relied on networks of smaller enterprises, including cottage and small-scale industries, to produce ancillary components and parts. Crucially, this subcontracting system was not merely extractive. Leading firms—most notably the zaibatsu and later the keiretsu—provided smaller suppliers with access to credit, technical guidance, machinery, and managerial expertise. This created a dependent yet developmental relationship, in which the growth of large firms was closely linked to the upgrading of their suppliers’ capabilities. Over time, these arrangements enabled smaller enterprises to acquire advanced production skills, adopt modern technologies, and gradually move up the value chain. The system also fostered cumulative learning, as knowledge and innovation diffused through long-term, trust-based relationships, laying the foundation for Japan’s broader industrial modernization and high-quality manufacturing base (Siddiqui, 2024b).

South Korea followed a comparable, though uniquely structured, approach in its post-war industrialization. During the 1960s–1980s, the state directed credit and investment to priority sectors, while chaebol conglomerates, such as Samsung and Hyundai, were tasked with not only developing their own capabilities but also integrating smaller domestic firms into their supply chains. The government supported technology transfer through licensing arrangements and promoted R&D collaboration between lead firms and small and medium-sized enterprises (SMEs). Importantly, these policies were combined with capacity-building measures, including technical education, vocational training, and the establishment of public research institutions that served as hubs for applied research. This created a structured pathway for domestic suppliers to gradually move up the value chain, acquiring technological know-how and innovation capacity along the way (Siddiqui, 2025a).

The state-directed development model in South Korea focused on building national champions—the chaebol—which in turn integrated domestic SMEs into tightly coordinated supply chains. Large conglomerates encouraged to source components locally wherever possible, while the government provided incentives for technology transfer, and skill development between lead firms and smaller suppliers. Similar to Japan, these subcontracting relationships were developmental rather than purely transactional: smaller firms gained access to technical knowledge, managerial practices, and capital equipment, allowing them to upgrade capabilities and move into higher-value production. The result was a dynamic ecosystem in which industrial growth and technological learning reinforced each other, contributing to South Korea’s rapid transformation from a largely agrarian economy to a globally competitive manufacturing hub.

The success of these Japan and South Korean economies reflects the operation of what scholars of innovation systems describe as national or sectoral innovation systems—complex networks of firms, research institutions, and government agencies that collectively generate, diffuse, and adapt knowledge. In Japan, the Ministry of International Trade and Industry (MITI) played a central role in coordinating industrial policy. It provided targeted guidance, subsidized technology acquisition, and encouraged long-term supplier–lead firm relationships through preferential financing and technical support programs. Keiretsu networks, in which large manufacturers maintained stable relationships with trusted suppliers and engaged in joint R&D, allowed incremental learning to diffuse systematically through domestic production networks.

Together, the Japanese and South Korean experiences illustrate a broader East Asian pattern in which developmental subcontracting and coordinated industrial policies created effective channels for domestic capability building. Unlike many countries in the Global South, where subcontracting often remains low-skill and extractive, these East Asian models demonstrate how targeted state intervention, firm-level learning, and structured supplier networks can combine to foster endogenous technological upgrading and sustained economic growth.

In other East Asian economies, subcontracting has played important role in industrial expansion. In countries such as Taiwan, and, to a lesser extent, Singapore and Hong Kong, the postwar period demonstrated the potential of carefully structured industrial linkages. Large firms in these economies did not merely outsource routine tasks; they engaged in coordinated relationships with smaller domestic suppliers, fostering learning, quality upgrading, and incremental innovation. These linkages created robust channels for technology transfer and skill development, enabling SMEs to participate actively in the modernization process.

By contrast, in much of the Global South, similar linkages with domestic firms have rarely served as effective conduits for meaningful technological learning. Subcontracting often remains transactional and limited to low-skill, low-value-added activities, leaving domestic suppliers outside the ambit of knowledge accumulation and innovation. This disparity underscores a critical need in the developing countries for deliberate industrial policies aimed at nurturing domestic technological capabilities. Such policies should prioritize the development and diffusion of technologies adapted to local conditions, factor endowments, and societal needs rather than relying primarily on foreign-owned, export-oriented multinational corporations. Learning from the East Asian experience, the Global South must consider mechanisms that integrate smaller domestic firms into production networks, provide incentives for upgrading, and encourage absorptive capacity development (Siddiqui, 2025b).

By situating industrial development within a deliberate industrial policy and a broader national innovation system, the East Asian experience shows that technology transfer on its own is not enough. Sustained economic growth emerges when learning becomes systematic, cumulative, and anchored in the development of domestic capabilities. For the Global South, this means moving beyond traditional strategies of importing technology and instead adopting policies that foster the structural and organizational foundations of endogenous innovation—foundations that can deliver productivity gains and support competition in increasingly sophisticated global markets.

II. Technological Innovation under Colonial Regimes

Technological innovation under colonial regimes was neither neutral nor emancipatory; it was fundamentally shaped by the imperatives of domination, extraction, plunder, and control of the resources. While colonial powers often claimed to be agents of progress and modernization, the technologies they introduced into colonised territories were designed primarily to serve metropolitan interests rather than to promote endogenous development or social well-being within the colonies themselves. Innovation, in this context, functioned as an instrument of empire rather than as a vehicle for inclusive advancement.

Colonial technologies were selectively introduced to enhance the efficiency of resource extraction and the administration of imperial rule. Infrastructure such as railways, ports, and telegraph systems is frequently cited as evidence of colonial development. However, these systems were overwhelmingly oriented toward connecting resource-rich interiors to coastal export hubs, facilitating the movement of raw materials to European markets. They rarely aimed to integrate local economies, improve intra-regional mobility, or meet the social and economic needs of indigenous populations. As a result, technological development followed extractive logics, reinforcing patterns of dependency that persist in postcolonial economies.

Moreover, colonial regimes systematically restricted technological knowledge and skills from diffusing into colonised societies. Advanced technical expertise remained concentrated in European hands, while indigenous populations were largely confined to manual or low-skilled roles. Educational systems were deliberately structured to produce clerks and intermediaries rather than engineers, scientists, or innovators capable of autonomous technological advancement. This deliberate underdevelopment of local technical capacity ensured that colonies remained reliant on metropolitan centres for both knowledge and machinery.

Colonial innovation also functioned as a mechanism of surveillance and coercion. Technologies such as mapping, census-taking, and later biometric identification were employed to classify, monitor, and control colonised populations. Scientific and technological practices were embedded within racial hierarchies, often legitimising colonial rule through pseudo-scientific claims of European superiority. In this way, technology did not merely extract value from colonised lands; it actively structured systems of governance that dehumanised and disciplined colonial subjects.

Importantly, colonial regimes frequently suppressed or devalued indigenous technological systems and knowledge traditions. Agricultural practices, medical knowledge, and craft industries developed over centuries were dismissed as backward or unscientific, despite their ecological sustainability and social relevance. In many cases, colonial policies actively dismantled local industries—most notably textile production in India—to eliminate competition with European manufacturing. Thus, colonial “innovation” often entailed the destruction of existing productive systems rather than their improvement.

The long-term consequences of these technological arrangements are profound. Postcolonial states inherited infrastructures designed for extraction, not development, alongside economies structurally dependent on exporting raw materials (Siddiqui, 2020) and importing finished goods. The absence of robust technological ecosystems and research institutions is not a failure of postcolonial governance alone but a direct outcome of colonial policies that systematically prevented technological sovereignty.

In fact, technological innovation under colonial regimes was deeply asymmetrical. It advanced the wealth, power, and industrial capacity of imperial centres while constraining the technological horizons of colonised societies. Rather than fostering universal progress, colonial innovation entrenched global inequalities by ensuring that technological advancement remained a privilege of the colonisers, leaving behind legacies of dependency that continue to shape the contemporary global order (Siddiqui, 2024c)

Historically, this transformation in the Global South involved the destruction of handicraft industries, seen as a necessary prelude to establishing modern industrial capacity. Under British colonial rule, however, artisans who lost their trades and traditional skills faced a markedly different fate than their European counterparts (Siddiqui, 2024d).

Apologists for colonialism frequently advance the argument that societies should “forget the past and focus on the present.” At face value, this claim appears to promote reconciliation and progress. However, such appeals are neither neutral nor benign. Rather, they function as a political strategy designed to protect historical privilege and silence legitimate claims for justice. In effect, this argument translates into an implicit message: “we have already achieved what we sought through colonial domination; therefore, do not confront us with the moral consequences of our actions, and abandon your demands for redress.”

For colonised societies, forgetting the past is not a simple act of closure; it is tantamount to erasing the future. The past is not merely a record of suffering but also a repository of aspirations, hopes, and motivations for building alternative futures. Historical memory provides the basis upon which claims for justice, reparations, and structural transformation are articulated. To demand forgetting, therefore, is to delegitimise these aspirations and to foreclose the possibility that historical injustices might be addressed meaningfully in the future. In this sense, the call to “move on” effectively dismisses the collective hopes and political agency of entire colonised nations, while affirming the outcomes desired by colonisers and occupying powers.

Moreover, such rhetoric requires the systematic erasure of historical crimes. These include slavery, settler colonialism, the large-scale plunder of resources across the Global South, and, more recently, military interventions and invasions such as those in Iraq, Libya and Syria, alongside persistent interference in the political and economic affairs of former colonies. Forgetting the past thus becomes a prerequisite for maintaining contemporary forms of domination, allowing European and broader Western power to continue largely uninterrupted and unaccountable. In other words, it is an invitation to proceed exactly as before, reproducing the same hierarchies under the guise of progress and modernity.

This selective amnesia operates as a weapon of the powerful. Those who have benefitted most from colonialism and its afterlives are precisely those who call for forgetting, as memory poses a threat to the status quo. Historical accountability would necessitate questioning existing global inequalities, wealth distributions, and power structures that remain deeply shaped by colonial extraction and violence.

Finally, the claim that colonialism brought innovation and development to colonised societies collapses under closer scrutiny. While technological advancements were indeed introduced, they were neither designed nor deployed for the benefit of the colonies themselves. Instead, innovation under colonial rule was primarily instrumental, aimed at facilitating extraction, control, and profit. Advanced technologies remained firmly under European control and later that of the Global North, reinforcing dependency rather than fostering autonomous development. Colonialism, therefore, did not cultivate genuine innovation within colonised societies; it systematically obstructed it.

Taken together, the injunction to forget the past is not a forward-looking proposition but a deeply conservative one. It seeks to preserve existing global inequalities by denying the historical processes that produced them, thereby undermining both justice in the present and the possibility of a more equitable future.

The debate between Niall Ferguson and Pankaj Mishra concerns colonialism, Western civilization, and the interpretation of global history. It escalated after Mishra’s review of Ferguson’s Civilization, in which he characterized Ferguson’s arguments as “Stoddardesque” and suggested racialized assumptions. This exchange developed into a public controversy involving legal threats and mutual accusations. Ferguson defended his work by rejecting racial determinism and emphasizing the institutional achievements of Western societies. Mishra, however, argued that Ferguson’s framework marginalized the violence and exploitation of empire and privileged Western narratives of progress. In From the Ruins of Empire, Mishra advances an alternative perspective by highlighting Asia’s intellectual and political responses to colonial domination. The dispute thus reflects broader tensions between celebratory accounts of Western modernity and critiques that foreground the experiences of the colonized world. The debate thus reflects a broader historiographical divide between institutionalist defences of Western modernity and postcolonial critiques that foreground imperial power and colonial experience (Mishra, 2013).

III. Literature Review

Maurice Dobb states that the choice of technique is inseparable from the broader allocation of investment between consumer-goods industries and heavy or capital-goods industries. Drawing on the Soviet experience of the 1930s, he underscored that backward economies must prioritize sectors that generate technological capabilities, intermediate inputs, and capital equipment. These choices, though costly in the short run, form the foundation for innovation, structural change, and long-term economic growth (Dobb, 1960).

For Dobb (1960), economic development was synonymous with industrialization—a process of structural transformation that moves labour from agriculture to industry to raise overall productivity and employment. Maurice Dobb’s model is particularly relevant for underdeveloped and post-colonial economies, which face structural constraints such as low capital stock, technological dependence, and historical legacies of unequal exchange. His framework offers guidance for overcoming these impediments by linking technological choice to broader questions of industrial structure and social transformation.

During the early industrialization of Britain, France, and Germany, displaced artisans were, to a significant degree, absorbed by rapidly expanding industries. These governments facilitated this transition through the provision of elementary education and the retraining of the workforce, thereby creating new employment opportunities. In the colonies, by contrast, artisans displaced by rising manufactured imports received no such support in skills development or retraining. Furthermore, the few modern industries established in India reserved skilled positions for British personnel, systematically excluding native workers (Siddiqui, 2015). Critically, this period of industrial disruption did not coincide with a significant expansion of primary education for the general population. The limited educational institutions that were opened catered primarily to a small elite from the upper castes, thereby creating a new form of structural dependency on Britain rather than fostering broad-based development (Siddiqui, 1996).

The pivotal role of innovation in economic dynamics was first highlighted by Joseph Schumpeter. His theory of “creative destruction” posits that economic growth is a disruptive, cyclical process driven by entrepreneurs who introduce radical innovations—new products, processes, or markets. These innovations grant temporary monopoly profits but ultimately render existing industries obsolete, creating a wave of economic transformation. For Schumpeter, this entrepreneurial competition through innovation, not price competition, is the core engine of capitalism. Consequently, public investment in education and infrastructure is vital to enable this entrepreneurial function and to facilitate the diffusion of new technologies (Sweezy, 1943).

In contrast to Schumpeter’s focus on entrepreneurial dynamism, neoclassical exogenous growth models, such as the Solow model, treat technological progress as an external (exogenous) force—a “manna from heaven” that independently drives long-run growth. In these models, growth is ultimately determined by external factors like the savings rate and population growth, with technological advancement remaining unexplained within the economic framework (Sweezy, 1943).

This explanatory gap was addressed by endogenous growth theory, pioneered by Paul Romer. Romer’s model (1986) endogenizes technological progress, arguing it arises from intentional, profit-maximizing investments within the economic system—specifically in human capital formation and research and development (R&D). Later contributions, such as those by Barro (1990), emphasized the complementary role of public expenditure in fostering these growth-generating activities. The key divergence from Schumpeter lies in the mechanism: while Schumpeter focused on the disruptive act of the entrepreneur, endogenous theory systematizes the investment in knowledge and innovation as a continuous, scalable process. Crucially, both Schumpeterian and endogenous perspectives affirm the state’s crucial role in optimizing conditions for innovation through education, R&D policy, and public investment.

The implication of this theoretical evolution is profound for development strategy. Endogenous models demonstrate that technological progress is not a random external gift but a product of internal policy choices. Therefore, for countries in the Global South, achieving prosperity and higher incomes in a globally competitive environment necessitates the deliberate cultivation of an ecosystem capable of developing and adopting appropriate technologies. This requires policies that go beyond merely importing technology and instead foster the domestic capacity for innovation and its diffusion, tailored to local conditions and development goals. The experiences of China, Vietnam, and Malaysia since the 1980s provide empirical illustrations of how late-industrializing economies can strategically manage technological upgrading, industrial diversification, and human-capital formation within varying institutional settings (Siddiqui, 2025b).

Neoclassical growth theory seeks to explain the determinants of long-term economic expansion. Within this tradition, a fundamental distinction exists between exogenous and endogenous models. Exogenous growth theory posits that sustained growth is driven primarily by factors external to the economic system, such as an unexplained rate of technological progress or an exogenous savings rate. The Solow model exemplifies this approach, where, given fixed labour and static technology, an economy converges to a steady-state equilibrium. Further growth beyond this point requires external “shocks,” typically technological advances treated as manna from heaven.

In contrast, endogenous growth theory, developed by economists like Paul Romer, internalizes the engine of growth. It argues that long-term expansion is a byproduct of activities within the economic system itself, such as deliberate investments in human capital, research and development (R&D), and policy-driven innovation. Here, technological progress is not an external gift but the result of intentional, profit-motivated investment. While both exogenous and endogenous neoclassical models stress the critical role of technology in achieving sustained growth, they fundamentally disagree on its source: external and unexplained versus internal and systematically generated.

A broad consensus in development economics holds that innovation is a key driver of productivity increases, structural change, and economic modernization, which in turn are fundamental to sustained GDP growth. The theoretical exploration of how innovation fuels growth has evolved significantly, most notably through the distinction between exogenous and endogenous growth models.

IV. Empirical Evidence

The OECD (2010) study argues that innovation is a key driver of economic growth and job creation across all levels of development. Both highly industrialized and least developed economies can benefit from well-designed policy interventions that promote innovation. Consequently, a stronger understanding of innovation and innovation policy should occupy a more prominent place on the global development agenda, a need to which this volume seeks to contribute. The OECD (2010) further emphasizes that innovation driven by research and development (R&D) must be broadened to include other forms of knowledge and learning (Kraemer-Mbula and Wamae, 2010).

With respect to improving knowledge on innovation in developing countries, the OECD study highlights a persistent gap: despite the well-established link between innovation and economic performance, Africa continues to lag behind other regions. The continent has experienced a marked decline in economic growth since the early 2000s, falling from a peak of 6.6% in 2002 to –2% in 2020 (World Bank 2022). The disparity is even more pronounced in indicators of research and innovation. Africa contributes only 2% of global research output, accounts for merely 1.3% of global R&D expenditure, and generates just 0.1% of worldwide patents (Kraemer-Mbula and Wamae, 2010).

Against this backdrop, the present study investigates empirically the impact of innovation on economic growth in African countries. More broadly, it seeks to examine whether research and innovation constitute the missing links in the continent’s economic development.

The role of innovation in driving economic growth has been well documented in developed economies. Pradhan et al. (2020), for instance, demonstrate that innovation positively contributes to growth in OECD countries. In contrast, relatively few empirical studies have examined the innovation–growth nexus in African economies, and the limited existing work typically focuses on a single region or a small group of countries. To address this gap, the present study investigates the relationship between innovation and economic growth in 32 African countries.

Pradhan et al study contributes to the literature in several ways. First, it employs a comprehensive innovation index for a wide set of African countries, offering insights that are particularly relevant for policymaking in the post-COVID-19 era. Unlike conventional indicators such as R&D expenditure or patent counts, the innovation index captures multiple dimensions of national innovation systems. Second, the study estimates a full endogenous growth model that incorporates human capital, allowing for a more complete assessment of the factors that drive the economic transformation Africa urgently requires. Third, it provides evidence on the variables that may help African countries overcome the post-pandemic growth slowdown and move closer to achieving the Sustainable Development Goals (SDGs) by 2030. The findings are expected to inform economic planners and policymakers across the continent (Kasongo and Makamu, 2024).

Pradhan et al. analysis (2020) examines the impact of innovation on economic growth in 32 African countries from 2006 to 2017 using a panel-corrected standard error (PCSE) estimation approach. The results are consistent with predictions of the endogenous growth model, indicating that innovation exerts a positive and statistically significant effect on economic growth in African economies. However, the study also highlights the need for improved reporting of innovation-related indicators—such as R&D survey data and patent registration records—to strengthen the evidence base for policy decision-making. Enhancing these systems is essential for enabling African countries to participate effectively in the Fourth Industrial Revolution and to close the gap with more advanced economies.

Although substantial work remains to strengthen innovation systems across the continent, several African countries have made notable progress in implementing innovation-oriented policy initiatives over the past decade. South Africa, Rwanda, Kenya, Nigeria, and Morocco, for example, have launched targeted strategies to stimulate innovation-led growth. Rwanda has established the National Commission for Science and Technology, expanded R&D centres, and introduced various incentive schemes for R&D and innovation. Kenya has invested in the development of institutions that support science, technology, and innovation, including an innovation policy framework that articulates the country’s long-term vision. A key element of this framework is the emphasis on generating and managing intellectual property rights—alongside technology transfer, development, and diffusion—to enhance national innovation capacity (Kasongo and Makamu, 2024).

The study by Pradhan et al. analysis (2020) further recommends, first, that African governments increase financial and material support for R&D in both public and private institutions. Such support should include dedicated funding mechanisms, initiatives that encourage entrepreneurial research mindsets among academics, and the creation of an enabling environment that allows business enterprises to conduct research and innovate effectively. Second, the study recommends that African countries strengthen their national innovation systems by fostering robust collaboration among researchers in academic institutions, experts in the business community, financial institutions, and policymakers. Such collaboration is essential for building resilient local innovation capabilities that can withstand economic turbulence (Siddiqui, 2025c).

Another study by the World Bank (2017) provides extensive analysis of innovation in developing countries and identifies what it terms an “innovation paradox”: despite the potentially high returns to innovation, firms often underinvest not because of lack of interest, but because of weak managerial capabilities, poor policy alignment, and financing constraints. The report highlights the importance of building basic managerial and organizational competencies, improving human capital, strengthening university–industry linkages, and adopting policy instruments—such as the “capabilities escalator”—that are tailored to a country’s stage of development. The emphasis is placed on technological adoption and improvements in firm practices rather than on R&D alone. The study also examines innovation financing, green innovation, and the effectiveness of innovation agencies, drawing on Enterprise Survey data that document substantial returns to innovation activities. Overall, developing countries tend to underinvest in innovation due to weak institutions, skill shortages, and ineffective policy frameworks. According to the World Bank, policy interventions should begin by reinforcing firm-level fundamentals—including management quality, workforce skills, internal incentives, and outward orientation—and by promoting technology diffusion alongside invention. Collaboration between firms and universities or research centres significantly enhances the likelihood of innovation (World Bank, 2017).

Analysing GDP growth in China and India from 1981 to 2004, Fan (2011) finds that innovation capacity played a substantial role in driving economic expansion in both countries, particularly after the 1990s. He measures innovation-related output through indicators such as high-tech exports, patent activity, and the expansion of services and manufacturing. The study highlights that the rising innovation capacity of China and India is largely attributable to significant public and private investment in R&D and human capital development (Siddiqui, 2025d). Both economies experienced accelerated growth beginning in the 1980s; by 2006, China and India had become the world’s fourth- and twelfth-largest economies, registering average GDP growth rates of 9.8% and 6% respectively over the 1981–2004 period (Siddiqui, 2019a; The Economist, 2007).

Fan’s (2011) study argues that “the considerable progress of China and India in innovation capacity can be reflected by rapidly growing patents and high tech/service exports. First, patent activities, measured by patents granted by the US patent office, have increased significantly for China and India …Innovation activities in domestic organisation seem to be more active in China than those in India as 44 of the top 50 patent winners in China are domestic firms, while about 30 out of the top 50 patent winners in India are foreign multinationals…Nevertheless, the situation seems to be changing; only 15% of patents during 1990-2001 went to foreign affiliates located in India… Second, China and India have successfully promoted their high-tech and service exports in recent decades (China outperforms in high-tech export while India excels in service export), thus enjoying mounting economic benefit derived from technological progress in global market. While high-tech exports accounted for 5% of China’s overall exports and less than 1% of GDP in 1992, they reached $163 billion, accounting for over 25% and 8.4% of total exports and GDP respectively in 2004.” (Fan, 2011:54)

Acemoglu et al. (2005) similarly emphasize the central role of institutions in shaping long-run economic performance. They argue that institutional quality influences how human capital is allocated, including the extent to which it is directed toward R&D activities that support sustained economic growth. Effective institutions are characterized by the enforcement of contracts, protection of property rights, predictable and efficient judicial systems, transparent public administration, low levels of corruption, pro-market regulatory frameworks, and the implementation of the rule of law. These institutional features collectively promote investment, innovation, and broader economic development.

V. A Radical Critique: The Marxist Perspective

The endogenous growth model incorporates a production function for aggregate output in which capital and labour serve as the primary inputs. This model modifies the traditional one-sector growth framework by allowing productivity improvements to be generated internally rather than treated as exogenous. In this context, productivity growth may arise from increasing returns to scale associated with R&D activities and investments in human capital. Thus, endogenous growth theory is fundamentally concerned with identifying the sources of productivity increase.

In addressing this issue, Fine (2000:249) argues that: “A crucial consequence of endogenous sources of productivity increase is that they involve market imperfections. This has provided the second central component of endogenous growth theory. With all agents optimising on the basis of given prices, an associated equilibrium is not Pareto-efficient. This is a simple result of the externalities or socially increasing returns to scale involved. Generally, it follows that the competitive outcome induces a level of saving that is below the optimum, since private agents take into account the knock-on effects of corresponding levels of investment.”

A key contribution of endogenous growth theory, therefore, lies in its explanation of how productivity changes occur and how market imperfections shape these dynamics. Schumpeter’s work provides an important foundation, highlighting monopoly rents as the main incentive for innovation. However, this approach often omits the role of broader social forces, economic structures, and production relations in shaping technological change.

In this respect, endogenous growth theory stands in contrast to the classical political economy tradition. Adam Smith emphasized the role of an expanding division of labour in enhancing productivity; David Ricardo developed a theory of differential rent embedded in changing economic structures; and Karl Marx identified the accumulation of capital as the driving force behind technological advancement and productivity increases. These classical approaches raise fundamental questions about how value is formed in an economy undergoing technological change—whether through the deepening division of labour or shifts in the composition of capital (Robinson, 1956).

Be Fine (2000:249) concludes: “Policy implications, especially as regards trade liberalisation, depend upon the mechanisms through which endogenous growth is generated and the market imperfections to which they are attached… [free trade] will allow for the greatest scope for spillover and other effects to accrue, although it is possible for either poor or rich countries to lose, depending upon the relative impact of scale economies, catch-up and first-mover advantages. Whilst trade and other policy measures can be considered together, as in levels of education expenditure, endogenous growth theory in the context of trade policy rarely considers the portfolio policies that might promote competitive advantage in particular sectors.”

Marxist critique fundamentally challenges the premises of both neoclassical frameworks. It contends that models such as those of Solow and Romer abstract from the underlying social relations and contradictions that structure capitalist economies. By treating individual agents, aggregate capital, and technology as neutral or depoliticized inputs, these models overlook core dynamics such as class struggle, the exploitation of labour through surplus value extraction, and capitalism’s inherent tendencies toward crisis and instability.

The critique calls for a renewed emphasis on substantive state intervention, social planning, and the reactivation of Marxist analytical tools. In a period marked by structural crises within the global capitalist system, an approach grounded in class analysis and attention to social conflict is presented as indispensable for formulating a coherent alternative to neoclassical interpretations of economic growth.

From Marxist perspective, mainstream growth theories offer a highly sanitized understanding of economic dynamics. They fail to explain why capital accumulates in the first place, how income distribution between wages and profits—central to shaping aggregate demand—is determined, or why growth is historically interrupted by phases of stagnation, crisis, and financial upheaval. Even endogenous growth models, despite acknowledging the importance of innovation, tend to conceptualize technology as a public good or as an extension of human capital. In doing so, they overlook the extent to which technological change is embedded in class conflict—for example, the adoption of labour-saving technologies as a strategy to discipline labour and expand surplus value (Siddiqui, 2023).

Despite their theoretical innovations, the “new” endogenous growth models do not constitute a complete departure from Solow’s formal framework. They remain situated within a neoclassical macrodynamic structure that retains the same foundational assumptions. As a result, both exogenous and endogenous neoclassical models struggle to account for long-period growth. Their reliance on problematic constructs—such as the representative agent—and their treatment of the state as a neutral or benevolent “planner” detached from class interests render them ill-equipped to explain the structural features and historical dynamics of capitalist development.

VI. Conclusion

Scholars have long noted that in the early stages of modernization, public expenditure on skills development, training, and R&D is crucial, as it fosters productivity gains, enhances profitability, and stimulates investment. In addition, China and India have benefited from a comparative advantage in labour costs (Siddiqui, 2024e), which—combined with economic reforms and increasing openness—has attracted substantial foreign investment and technology inflows. This trajectory parallels the experience of East Asian economies in the 1960s and 1970s, where rapid growth was propelled by low wages, foreign capital, and imported technologies, ultimately contributing to rising domestic incomes and overall economic transformation.

The relationship between innovation and economic growth remains a central concern in development economics. The endogenous growth theories have provided valuable insights into how capital accumulation, human capital formation, and technological progress contribute to long-run growth. Endogenous models, in particular, highlight the importance of knowledge creation, R&D, and learning-by-doing, offering a framework in which innovation becomes an internal driver of productivity rather than an external shock. Empirical evidence from African countries reinforces these insights, demonstrating that innovation—broadly conceived—plays a significant role in shaping growth trajectories, especially when supported by effective institutions, human capital, and coherent policy frameworks.

Yet the limitations of mainstream growth theory are equally apparent. By abstracting from the social relations that underpin capitalist economies, neoclassical and endogenous models tend to depoliticize technology and overlook the structural forces that influence investment, income distribution, and long-period dynamics. A Marxist critique highlights these omissions, emphasizing class conflict, surplus value extraction, and the contradictory tendencies of capital accumulation as fundamental drivers of technological change and economic instability (Siddiqui, 2023). This perspective draws attention to the ways innovation can be both a force for productivity and a tool for intensifying exploitation or deepening inequality (Siddiqui, 2019b).

Taken together, these approaches suggest that a comprehensive understanding of innovation and growth requires integrating insights from both theoretical and empirical works. Innovation remains indispensable for expanding productive capacity and supporting development, but its effects cannot be divorced from the institutional and social contexts in which it unfolds. Strengthening national innovation systems, building human capabilities, and fostering collaboration among firms, universities, and the state are vital steps. At the same time, acknowledging the political economy of technological change—particularly questions of power, distribution, and structural constraint—is essential for constructing policies that promote inclusive and sustainable growth. In this sense, a more pluralistic approach to growth theory offers a promising path forward, one that recognizes both the transformative potential of innovation and the social forces that shape its outcomes.

About the Author

Dr. Kalim Siddiqui is an economist specializing in International Political Economy, Development Economics, Trade and Economic Policy. Since 1989, he has been teaching economics at various universities in Norway and the UK. Dr. Siddiqui’s research interests encompass a wide range of topics, including political economy, international trade, and economic history, South Asia, and emerging economies. He has presented papers at international conferences across numerous countries, reflecting his global engagement in the field. His scholarly pursuits span six broad domains: Political Economy, Development Economics, Economic History, Economic Policy, Globalization, and International Trade. Dr. Siddiqui has made significant contributions to research in areas such as trade policy, globalization, and political economy. His work has been published in chapters of edited books and articles published in peer-reviewed journals. For inquiries, Dr. Siddiqui can be reached at: [email protected]

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