Towards a Microeconomics of Growth

The emergence of new economic activities is the driving force of economic development. The development of such activities is often ‘lumpy’, manifesting itself in rapid growth of particular regions or sectors. Recognition of these facts requires a reorientation of the analytical frameworks and empirical approaches that are used to investigate growth. In particular, we need to understand what drives growth at the microeconomic level.The paper starts by reviewing some of the evidence on the spatial and sectoral concentration of fast growing activities. It then outlines some simple theory which helps us to understand why particular locations experience rapid growth whilst others remain backward. We find it useful to divide the factors that determine a location’s growth performance into two groups, that we term ‘1st advantage’ and ‘2nd advantage’. ‘1st advantage’ refers to the conditions that provide the environment in which new activities can be profitably developed. They include most of the factors that traditional theory has focussed on, such as access to inputs (labour and capital), access to markets, provision of basic infrastructure and the institutional environment. ‘2nd advantage’ factors increase returns to scale and can lead to cumulative causation processes. They may be acquired by learning, through technological spillovers, and by the development of thick markets of suppliers and local skills. Furthermore, these increasing returns are often external to the firm and thus associated with market failure. It is increasing returns that underlie the ‘lumpiness’ of development.[...]