Endogenous Growth Theory and Economic Development: Can Innovation Drive Long-Term Goals for Emerging Markets? The Case of India

This research paper explores the interplay between economic diversification, innovation, and growth in small open economies, with a focus on addressing market failures under uncertainty. The study integrates insights from endogenous growth theory and general-equilibrium frameworks to analyse two key distortions: insufficient ex-ante investment in modern sectors and excessive ex-postproduction diversification. The paper argues that optimal policy should balance incentives for entrepreneurship and innovation while rationalizing production to align with comparative advantage. The model builds on the concept of “creative destruction,” where vertical innovations drive growth but are hindered by intertemporal spillovers and businessstealing effects. Key determinants of growth—such as innovation size, skilled labour force, and research productivity—are examined alongside their welfare implications. The paper also evaluates neoclassical theories of growth, comparing models cantered on physical capital, human capital, and learning-by-doing to empirical evidence. By synthesizing these perspectives, the study aims to provide actionable policy recommendations for fostering sustainable growth in developing economies, emphasizing the need to internalize knowledge spillovers and mitigate inefficiencies in resource allocation. The findings will contribute to debates on industrial policy, R&D incentives, and the role of government in correcting market failures.