Abstract

The explanation of economic growth by classical theories of economics appear inadequate to account for the influences and interactions of multiple factors like foreign direct investment, cross-country mobility of the factors of production, levels of good governance and inequality, technology and information flow, integration and regionalism. As a consequence, economists have now shifted their focus to the creation and diffusion of knowledge to explain the varying levels of economic growth and development. In the last couple of decades, many countries have shown high economic performance by knowledge creation and its diffusion to the various sectors of the economy. This has come to be described as Knowledge-based Economy (KBE). The recent economic theories attempt to understand and explain the ever changing economic growth patterns. The economic growth phenomenon of the neo-classical era is not identical with that of today. As a result, new theories have been developed in order to explain the new notions of economic growth. Following the neo-classical approaches, other theories and concepts such as the ‘Keynesian view’, ‘Schumpeter’s new approach’, and ‘developmental state view’ have been coined by economists to understand the changing economic growth of the twentieth century and beyond. These theories are inadequate to explain the economic growth of the twenty-first century. Thus, there arose a need to adopt some new approach which can better explain the complex dynamism of recent economic system from a holistic perspective. This paper aims to introduce knowledge economy approach to explain the present emphasis on economic development.