Economics 216:The Macroeconomics of Development
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)Kwoh-Ting Li Professor of Economic Development
Department of EconomicsStanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lecture 13Human Capital and
Other Forms of Intangible Capital
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)Kwoh-Ting Li Professor of Economic Development
Department of EconomicsStanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lawrence J. Lau, Stanford University
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Characteristics of Human Capital Embodiment (bundled commodity) Long gestation period and hence long lead time Durability Non-appropriability Firm-specificity versus worker-specificity (flexibility,
adaptability and re-employability) Mobility
legal institutional
Imperfect substitutability with labor Complementarity with capital Network externalities and the benefits of networking
Lawrence J. Lau, Stanford University
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Forms of Investment in Human Capital Formal education Informal education Apprenticeship On-the-job training Learning-by-doing Health and nutrition
Enhances effectiveness and productivity Permits fuller utilization by reducing lost working days Lengthens the useful life
Population and family planning
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Complementarity Human capital is complementary to physical capital
Z. Griliches (1969), "Capital-Skill Complementarity," The Review of Economics and Statistics, 51: 465-468.
Boskin and Lau (1990) Human capital is complementary to R&D capital Human capital is complementary to technical progress
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Simultaneous Purely Capital- and Human Capital-Augmenting Technical Progress
Y = A0(t) F(AK(t)K, AH(t)H, AL(t)L)
= A0F(AK(t)K, AHH, ALL)
= A0F(AKK, AH(t)H, ALL)
= A0F(A(t)KH
, ALL)
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Incentives for Investment in Human Capital Private and social rates of return The possibility of both over- and under-investment Flexibility, adaptability and re-employability Education as consumption Education as a process of socialization Education as a screening/filtering/signalling mechanism
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Policy Choices Choice between public and private support Choice among educational levels--primary, secondary
tertiary Choice between general and technical/vocational The distribution of the burden of the costs of education Allocation of limited educational opportunities (by
nationwide examinations) Accreditation, standardization, quality assurance and
certification through examinations and tests
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Investment in Human Capitalin the East Asian NIEs Compulsory education of at least 9 years Government support for tertiary education (almost
exclusively so in Hong Kong and Singapore, followed by Taiwan, with South Korea having the highest proportion of private institutions of higher learning)
College enrollment rates have remained high in South Korea and Taiwan and are rising in Hong Kong and Singapore
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Human Capital
Figure 3.1 Human Capital
0
2
4
6
8
10
12
14
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991
Avera
ge S
ch
oo
l Y
ears
per
Wo
rkin
g-A
ge P
ers
on
USA FRA GER
UK JPN HON
KOR SIN TWN
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Human Capital per Unit Labor
Figure 4.2 School Years per Labor Hour
0
2
4
6
8
10
12
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991
School Years
per
Thousand H
ou
rs
USA FRA GER
UK JPN HON
KOR SIN TWN
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Sources of Economic Growth with Explicit Inclusion of Human Capital
Table 2.3: Relative Contributions of the Sources of Economic Growth (percent)
Intangible CapitalTangible Labor Human R&D Technical TotalCapital Capital Capital Progress
Hong Kong 66 22 11 NA 0 11Singapore 63 25 13 NA 0 13S. Korea 67 19 14 NA 0 14Taiwan 75 14 11 NA 0 11Japan 48 6 3 NA 43 46Non-Asian G-5 32 7 5 NA 57 62
Lawrence J. Lau, Stanford University
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The Effects of Human CapitalMicroeconomic Studies Wage function studies
G. Psacharopoulos (1981), "Returns to Education: An Updated International Comparison," Comparative Education Review, 17: 321-341.
G. Psacharopoulos (1985), "Returns to Education: A Further International Update and Implication," Journal of Human Resources, 20: 583-604.
Production function studies Jamison and Lau (1982), Farmer Education and Farm Efficiency,
Baltimore: Johns Hopkins University Press. Profit function studies Technology adoption studies
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Problems of Wage Function Studies A wage function is a regression of the wage rate of a
worker on the characteristics of a worker, including age, education, experience, gender, seniority on the job, etc.
Problems of interpretation (does education matter?): 1.The Screening Hypothesis (including signaling and sorting) 2.Self-selection 3.Credentialism 4.Possible networking benefits
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The Effects of Human CapitalMacroeconomic Studies Aggregate production function studies
Lawrence J. Lau, Stanford University
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Problems of Macroeconomic Studies Multicollinearity with time and other variables
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R&D Capital A source of technical progress
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The Case for Investment in R&Din Developing Economies (1) Essentiality of indigenous R&D for the successful
exploitation of imported technology, e.g., new rice variety The distribution of gains from technology trade and
transfer is biased in favor of the innovators and the owners of intangible capital (e.g. brand names) and not the imitators
Licensing frequently takes the form of cross-licensing R&D projects as an instrument of industrial policy
(Strategic R&D)
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The Case for Investment in R&Din Developing Economies (2) The experience of developed economies, especially that of
Japan, suggests that investment in R&D capital and other forms of intangible capital has high returns
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Characteristics of R&D Projects High risk Long gestation period “Lumpiness”--critical mass required Possible non-appropriability of benefits
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The Case for Public Support Non-appropriability--social rate of return greater than
private rate of return Size distribution of firms Non-availability of venture capital
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Investment in R&D Capitalin the East Asian Economies (1) Government support
In Japan, Hong Kong, Singapore and Taiwan, the government and quasi-public institutions support as well as conduct R&D (e.g. the Industrial Technology Research Institute in Taiwan and the Nanyang Technological University in Singapore)
In addition, in these countries, as well as in South Korea, the government provides tax and other incentives for private R&D
Protection of intellectual property rights has been significantly strengthened
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Investment in R&D Capitalin the East Asian Economies (2) Japan’s Experience Taiwan’s Experience
The personal computer industry in Taiwan provides a successful example of government-financed R&D as an instrument of industrial policy
The semiconductor industry South Korea’s Experience
In South Korea, the chaebols (large conglomerates) with “deep pockets”, such as Samsung and Hyundai, invest heavily in R&D
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R&D Expenditureas a Percentage of GDP
Percentage of Total R&D Expenditure in GDP (Current Prices)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993
Perc
en
t
USA FRA GER
UK JPN HON
KOR SIN TWN
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R&D Capital
Figure 3.2 R&D Capital
0
100
200
300
400
500
600
700
800
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991
Bil
lio
ns o
f 1980
US
Do
llars
USA FRA GER
UK JPN KOR
SIN TWN
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R&D Capital Stock per Unit Labor
Figure 4.3 R&D Capital Stock per Labor Hour
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991
198
0 U
S D
olla
rs
USA FRA GER
UK JPN KOR
SIN TWN
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Sources of Economic Growth with Explicit Inclusion of Human and R&D Capital
Table 2.4: Relative Contributions of the Sources of Economic Growth (percent)
Intangible CapitalTangible Labor Human R&D Technical TotalCapital Capital Capital Progress
Korea 62 18 5 15 0 20Singapore 56 22 5 16 0 21Taiwan 65 15 4 16 0 20Japan 37 5 1 8 49 58Non-Asian G-7 40 4 4 10 43 56
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Investments in Other Forms of Intangible Capital Design--development of core competence (out-sourcing
wherever possible and justified) Goodwill
Advertising Brand names--Japan is the only country which has consistently and
successfully developed brand names (Lexus, Shiseido, Sony) Market development Distribution systems
Information System and Software
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The Role of Intangible Capital Different types of measured inputs play different roles at
different stages of economic growth Tangible capital accumulation is the most important source
of growth in the early stage of economic development But simply accumulating tangible capital is not enough--it
must also be efficiently allocated Efficient tangible capital accumulation is the major
accomplishment of the East Asian NIEs Intangible capital accumulation becomes important only
after a certain level of tangible capital per worker is achieved
Lawrence J. Lau, Stanford University
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Investment in Intangible Capitalin Developing Economies (1) Tangible capital accumulation is critical in the early
stage of economic development (2) There is a long way to go on tangible as well as
intangible capital accumulation before the levels of the industrialized economies are reached
(3) Because of its complementarity with tangible capital, investments in intangible capital can retard the decline in the marginal productivity of tangible capital JAPAN HAS SHOWN HOW THIS CAN BE DONE!
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Implications for Developing Economies Closing the gap on intangible capital
Investment in Human Capital (formal, technical, on-the-job training, and re-training)
Investment in R&D Capital Investment in other forms of Intangible Capital (Design, Market
Development, Information System and Software, Etc.) Protection of intellectual property Maintaining and creating competitive advantage
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The Possible Role of Governments of Developing Countries in R&D Focus on development rather than basic or applied research Consortium approach Standardization and grading Quality assurance
