0ed8f148-1bd2-4951-b3dd-3dc1d0e0a4ca20210209123400741wseamdt@crossref.orgMDT DepositWSEAS TRANSACTIONS ON BUSINESS AND ECONOMICS1109-952610.37394/23207http://wseas.org/wseas/cms.action?id=4016211202021120201710.37394/23207.2020.17http://wseas.org/wseas/cms.action?id=23182Endogenous Economic Growth: The Arrow-Romer Theory and a Test on Vietnamese EconomyNguyen NgocThachInstitute for Research Science and Banking Technology, Banking University HCMC, Ho Chi Minh City, VietnamThe Arrow-Romer growth model helped to overcome the main drawback of the Solow-Swan model, where technical change is created exogenously, not by the firms making decisions, and formulated the conditions for endogenous growth in an economy. Nonetheless, the presentation of the Arrow-Romer model and corresponding empirical studies by the Cobb-Douglas functions hides the role of the capital-labor relationship for economic growth. A constant elasticity of substitution (CES) function, constructed by Arrow et al. (1961), allows solving this problem. So, the purpose of the current research is to test the endogenous growth of the Vietnamese economy, which has experienced a more than 30-year market-oriented reform through specifying an aggregate CES function. By applying Bayesian nonlinear regression, the research results revealed the elasticity of factor substitution (ES) lower than one. This work theoretically and empirically contributes to the endogenous growth theory in problems concerned with emerging economies. Investments in physical and human capital and technological progress are the determinants of endogenous growth. From the findings obtained, the author concludes that even though having achieved a rather impressive growth rate over more than three decades, the Vietnamese economy has not yet generated the possibility of endogenous growth, and suggests that endogenous growth can be hardly generated in emerging economies like Vietnam if important growth policies related to accumulation of physical and human capital as well as enhancement of R&D activities are not simultaneously implemented. It is indispensable to focus on substantially improving institutional quality.562020562020374386https://www.wseas.org/multimedia/journals/economics/2020/a745107-947.pdf10.37394/23207.2020.17.37http://www.wseas.org/multimedia/journals/economics/2020/a745107-947.pdfAnh L.H., Kreinovich V., and Thach N.N., eds., Econometrics for Financial Applications. Cham: Springer, 2018.10.2202/1534-6005.1161Antras, Pol., Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution, Contributions to Macroeconomics, 4(1), 2004, pp.1–34.10.2307/1927286Arrow, Kenneth J., Hollis B. Chenery, Bagicha Singh Minhas, and Robert M. Solow, Capital Labour Substitution and Economic Efficiency, Review of Econ. and S tatistics, 63,1961, pp.225–50.10.2307/2295952Arrow, Kenneth J., The Economic Implications of Learning by Doing, Review of Economic Studies, 29 (June), 1962, pp.155–173. Azariadis, Costas, Intertemporal Macroeconomics, Hoboken: Blackwell Publishers, 1993. 10.2307/2550483Barkai, Haim, Ricardo on Factor Prices and Income Distribution in a Growing Economy,Economica, 26, 1959, pp. 240–50. Barro, Robert J., and Xavier Sala-i- Martin,Economic Growth. New York: McGraw-Hill, 1995.10.2307/1936009Berndt, Ernst, Reconciling Alternative Estimates of the Elasticity of Substitution,Review of Economics and Statistics, 58 , 1976, pp. 59–68. 10.2307/1937881Bodkin, Ronald G., and Laurence R. Klein, Nonlinear Estimation of Aggregate Production Functions, Review of Economics and Statistics, 49(1), 1967, pp. 28–44. Briggs, William and Hung T. Nguyen, Clarifying ASA’s View on P- Values in Hypothesis Testing, Asian Journal of Economics and Banking, 3(2), 2019, pp. 1–16.Cobb, Charles W., and Paul H Douglas, A Theory of Production,American Economic Review 18, 1928, pp.139–6510.1111/j.1465-7287.1997.tb00474.xCronin, Francis J., Elisabeth Colleran, and Mark Gold, Telecommunications, factor substitution and economic growth, Contemporary Economic Policy, 15, 1997, pp.21–31.Federal Reserve Bank of St. Louis, Penn World Table,2019. Available online: https://fred.stlouisfed.org.10.2307/1882709Ferguson, C., The elasticity of substitution and the savings ratio in the neoclassical theory of growth, Quarterly Journal of Economics, 79(3),1965), pp. 465–71. Galor, Oded, Convergence? Inference from theoretical models,Economic Journal, 106, 1995, pp. 1056–69. Hamermesh, Daniel, Labor Demand. Princeton: Princeton University Press, 1993.Heubes, Jurgen, Elasticity of substitution and growth rate of output, The German Economic Review, 10, 1972, pp. 170–75. Humphrey, Thomas M., Algebraic Production Functions and their Uses before Cobb- Douglas. Federal Reserve Bank of Richmond,Economic Quarterly, 83, 1997, pp. 51–83. 10.1007/978-3-030-04200-4_1Hung T. Nguyen, Nguyen Duc Trung, and Nguyen Ngoc Thach, Beyond Traditional Probabilistic Methods in Econometrics, In Beyond Traditional Probabilistic Methods in Economics,ECONVN 2019, Studies in Computational Intelligence, vol 809, Springer, Cham. https://doi.org/10.1007/978-3-030-04200-4_1 Huynh, The Nguyen, Factors affecting technical efficiency in Vietnamese small and medium enterprises,Journal of Asian Business and Economics Studies, 2019. Available online: http://jabes.ueh.edu.vn/Home/SearchArticle?article_Id=8fbfecc6-ffc8 -4ab8-84b7-5ca9b1ab8c50 10.2307/1909600Kamien, Morton I., and Nancy L. Schwartz ,Optimal “induced” technical change, Econometrica, 36, 1968, pp. 1–17. 10.1007/3-540-28556-3_2Karagiannis Giannis, Palivos Theodore, and Papageorgiou Chris,Variable Elasticity of Substitution and E conomic Growth: Theory and Evidence, New Trends in Macroeconomics, 2004. DOI: 10.1007/3-540-28556-3_2Khuc, Van Quy, and Tran Quang Bao, Identifying the determinants of forestry growth during the 2001–2014 period, Journal of Agriculture and Rural Development,12, 2016, pp. 2–910.1257/aer.90.1.282Klump, R., de La Grandville, O., Economic growth and the elasticity of substitution: Two theorems and some suggestions,American Economic Review, 90, 2000, pp. 282–29110.1111/1467-9442.00183Klump, R., Preissler, H., CES production functions and economic growth, Scandinavian Journal of Economics, 102, 2000, pp. 41–56.Kreinovich, V., Thach, N.N., Trung, N.D., and Thanh, D. Van, eds. Beyond Traditional Probabilistic Methods in Economics, Cham: Springer, 2019.Lagomarsino, Elena, A Study of the Approximation and E stimation of CES Production Functions. Ph.D. thesis, Heriot-Watt University, Edinburgh, Scotland, 2017.La Grandville, O., In quest of the Slutsky Diamond, American Economic Review, 79, 1989, pp. 468–481.10.1002/sim.2112Lambert, Paul C., Sutton, Alex J., Burton, Paul R., Abrams, Keith R., and David, R. Jones, How vague is vague? A simulation study of the impact of the use of vague prior distributions in MCMC using WinBUGS. Statist. Med., 24, 2005, pp. 2401–2428. 10.1086/259491Lloyd, Peter J., Elementary Geometric/Arithmetic Series and Early Production Theory, Journal of Political Economy, 77, 1969, pp. 21–34. McFadden, Daniel, Estimation Techniques for the Elasticity of Substitution and Other Production Parameters. North Holland,Contributions to economic analysis, 2, 1978, pp. 73–123. 10.2307/1914069Mizon, Grayham E., Inferential procedures in nonlinear models: An application in a UK industrial cross section study of factor substitution and returns to scale, Econometrica, 45, 1977, pp. 1221–42.Nerlove, Marc, Recent Empirical Studies of the CES and Related Production Functions,The Theory and Empirical Analysis of Production,31, 1967, pp. 55–136. Nguyen, Quang Hiep, Sources of province Hung Yen‘s economic growth, Journal of Economic Development, 275, 2013, pp. 28–39. 10.1017/s1365100509000479Palivos Theodore and Karagiannis Giannis,The Elasticity of Substitution in Convex Models of Endogenous Growth. Political Economy Perspectives on the Greek Crisis-Debt,Austerity and Unempoyment View Project, 2004. https://www.researchgate.net/profile/Theodore_Palivos/publication/27382259_The_Elasticity_of_Substitution_in_Convex_Models_of_Endogenous_Growth/links/0912f5093e536e81f7000000/The-Elasticity-of- Substitution-in-Convex-Models-of-Endogenous-Growth.pdfPereira, Claudiney M., Empirical Essays on the Elasticity of Substitution, Technical Change, and Economic Growth, Ph.D. dissertation, North Carolina State University, Raleigh, NC, USA, 2003.Pitchford, John D., Growth and the elasticity of substitution, Econ omic Record, 36, 1960, pp. 491–503. Pham, Le Thong, and Phuong Thuy Ly,Technical efficiency of Vietnamese manufacturing enterprises,Journal of Economics and Development, 229, 2016, pp. 43–51. 10.1214/ss/1015346320Roberts, Gareth O., and Jeffery S. Rosenthal,Optimal scaling for various Metropolis-Hastings algorithms,Statistical Science, 16, 2001, pp. 351–67.10.1086/261420Romer, Paul M., Increasing Returns and Long-Run Growth, Journal of Political Economy, 94, 5(October), 1986, pp. 1002–1037. 10.1086/ma.2.4623715Romer, Paul M., Cra zy Explanations for the Productivity Slowdown, NBER Macroeconomics Annual, Cambridge: MIT Press, 1987.10.1086/260806Samuelson, Paul A., Paul Douglas’s Measurement of Production Functions and Marginal Productivities,Journal of Political Economy, 87, 1979, pp. 923–39.10.1111/j.1475-4932.1963.tb01488.xSato, K., Growth and the elasticity of factor substitution: A comment – how plausible is imbalanced growth, Economic Record, 39, 1963, pp. 355–61. Schumpeter, Joseph A., History of Economic Analysis, London: Allen & Unwin, 1954. Solow, Robert M., A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, 70, 1(February), 1956, pp. 65–94. 10.2307/1926047Solow, Robert M., Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, 39, 1957, pp. 312–20.Solow, Robert M., Learning from “learning by doing”,Lessons for Economic Growth, Stanford, CA: Stanford University Press, 1997. Stigler, George J., The Ricardian Theory of Value and Distribution,Journal of Political Economy, 60, 1952, pp. 187.Swan, Trevor W., Eco nomic Growth and Capital Accumulation, The Economic Record32 (November), 1956, pp. 334–361.10.1007/978-3-030-48853-6_24Thach, N.N., Recovering from the Recession:A Bayesian Change-Point Analysis. In: Thach N.N, Kreinovich V, Trung N.D. (eds) , Data Science for Financial Econometrics, ECONVN2020,Studies in Computational Intelligence, vol. 898, Springer, Cham, 2020a. to appear.10.35808/ijeba/424Thach, N.N., The Variable Elasticity of Substitution Function and Endogenous Growth: An Empirical Evidence from Vie tnam,International Journal of Economics and Business Administration, VIII(1), 2020b; pp. 263–277. 10.3390/jrfm13020021Thach, N.N., How to Explain when the ES is Lower than One? A Bayesian Nonlinear Mixed-Effects Approach, J. Risk Financial Manag,13(2), (2020c), 21. https://doi.org/10.3390/jrfm13020021Tu, Thai Giang, and Phuc Tho Nguyen, Using the Cobb-Douglas to analyze the impact of inputs on coffee productivity in province DakLak,Journal of Economics and Development, 8, 2012, pp. 90–93. 10.1080/00708852.1973.10418905Velupillai, Kumaraswamy, The Cobb-Douglas or t he Wicksell Function?—A Comment, Economy and History , 16, 1973, pp. 111–13.Vietn amese General Statistics Office, Dan so va lao dong, 2019. Available online: https://gso.gov.vn/default.aspx?tabid=714.Yang Ruoyong and Berger Jam es O., A Catalog of Noninformative Priors, 1998. https://www.semanticscholar.org/paper/A-Catalog-of-Noninformative-Priors-Yang -Berger/f75f2549f7a273432cbe365e94d26a4b0e49428110.2307/2109526Yuhn, Ky-hyang, Economic growth, technical change biases, and the elasticity of substitution: A test of the la grandville hypothesis, The Review of Economics and Statistics, 73, 1991, pp. 340–46.