Institutions for Economic Development
Chapter 5: Building Systems of Innovation: Three Phases and Three Cases
While innovation systems include various combinations of institutions, organizations, and policies, their raw material is always human capital. There have been many attempts to measure and theorize about links between human capital and economic development. Nelson and Phelps (1966) suggest that countries with more human capital might more easily absorb technical knowledge from abroad. Romer (1990) argues that human capital is the key input to the research organizations that generate technical progress. In a sample of 98 countries between 1960 and 1985, Barro (1991) shows that economic growth correlated positively with initial human capital; also, nations with more human capital had lower fertility rates and greater investment in physical capital. Frantzen (2000) reveals how human capital increases productivity, while Benhabib and Siegel (1994, 2002) develop the Nelson–Phelps analysis and suggest that the spillovers of international knowledge that developing countries receive directly depend on education rates. Yet divergences continue. In the Nelson–Phelps approach, education speeds diffusion of technology, while in the opposite approach, education is a factor of production (Krueger and Lindhal, 2001). As Benhabib and Siegel suggest, the policy implications of both perspectives differ markedly. If technology diffusion is not instantaneous and firms are heterogeneous, any catching-up policy must be patient and focus on the long term. If, in contrast, education is a factor of production and agents are rational, then companies will hire educated labour and increase productivity quickly. This is closer to Gary Becker’s original concept of human capital. Catching up would thus be fairly rapid...
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