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Top1. Introduction
The neo-classical growth theories state that each economy has a steady state growth rate. All most all emphasis was placed on physical capital as the engine of growth, and the stability of the growth is established using flexible neo-classical production function. If the economy is not initially at stead state growth rate the economy will converge to steady state through adjustment in capital-output ratio. This growth rate is the best growth rate of the economy at a point of time, once the economy reaches the steady state per capita capital stock, per capita consumption and per capita income will not grow. These models fail to explain the determinants of long- run per capita growth. In order to overcome the limitation of the existence of long run growth the neo-classical school incorporates exogenous technological progress which is labor-augmenting in nature in the growth arena. The neo-classical growth model envisaged that each economy will converge to its steady state and the speed of convergence depends inversely to the distance from its own steady state. It also predicts convergence of economics i.e., economies with low per capita income relative to their steady state per capita income will grow at a faster rate. This sort of analysis completely ruled out the possibility of market failure and strategic complementarities and coordination failures. It eliminates the existence, functioning and the evolution of different economic and social institutions in nursing, augmenting and accelerating the speed for economic growth .Short run dynamics will lead to innovation and evolution in institutions in different social and economic spheres.
The models constructed by Arrow (1962) and Sheshinski (1967) incorporated the concept of leaning by doing in the sphere of growth theory where knowledge gathered from learning by doing by a firm or a person will diffuse and spill over to entire economy. The endogenous growth theories developed by, Romer (1986, 1990), Lucas (1988), Rebelo (1991) showed that determinants of growth are endogenous in nature. The experience and learning with production process or investment in human capital contributes to productivity and growth. Endogenous factors cause the aggregate production function to maintain increasing marginal productivity. The main contributing factor is learning by doing, knowledge capital, and the like. Positive growth may persist indefinitely because returns to capital goods do not diminish as economies develop. These theories incorporate R&D theories, human capital, diffusion of technology and imperfect competition into the theoretical and empirical analysis of growth. These models assume technological advance results from purposive R&D activities undertaken by firm, and this action is rewarded by some form of ex-post monopoly power. The study of diffusion of technology states that the follower economies imitate the advances in technology, since imitation is cheaper than innovation and thus leads to convergence in growth rates.