Economics 216: The Macroeconomics of Development Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA , U.S.A. Spring WebPages:

Lecture 13 Human 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 Economics Stanford University Stanford, CA , U.S.A. Spring WebPages:

Lawrence J. Lau, Stanford University3 Characteristics of Human Capital u Embodiment (bundled commodity) u Long gestation period and hence long lead time u Durability u Non-appropriability u Firm-specificity versus worker-specificity (flexibility, adaptability and re-employability) u Mobility u legal u institutional u Imperfect substitutability with labor u Complementarity with capital u Network externalities and the benefits of networking

Lawrence J. Lau, Stanford University4 Forms of Investment in Human Capital u Formal education u Informal education u Apprenticeship u On-the-job training u Learning-by-doing u Health and nutrition u Enhances effectiveness and productivity u Permits fuller utilization by reducing lost working days u Lengthens the useful life u Population and family planning

Lawrence J. Lau, Stanford University5 Complementarity u Human capital is complementary to physical capital u Z. Griliches (1969), "Capital-Skill Complementarity," The Review of Economics and Statistics, 51: u Boskin and Lau (1990) u Human capital is complementary to R&D capital u Human capital is complementary to technical progress

Lawrence J. Lau, Stanford University6 Simultaneous Purely Capital- and Human Capital-Augmenting Technical Progress

Lawrence J. Lau, Stanford University7 Incentives for Investment in Human Capital u Private and social rates of return u The possibility of both over- and under-investment u Flexibility, adaptability and re-employability u Education as consumption u Education as a process of socialization u Education as a screening/filtering/signalling mechanism

Lawrence J. Lau, Stanford University8 Policy Choices u Choice between public and private support u Choice among educational levels--primary, secondary tertiary u Choice between general and technical/vocational u The distribution of the burden of the costs of education u Allocation of limited educational opportunities (by nationwide examinations) u Accreditation, standardization, quality assurance and certification through examinations and tests

Lawrence J. Lau, Stanford University9 Investment in Human Capital in the East Asian NIEs u Compulsory education of at least 9 years u 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) u College enrollment rates have remained high in South Korea and Taiwan and are rising in Hong Kong and Singapore

Lawrence J. Lau, Stanford University10 Human Capital

Lawrence J. Lau, Stanford University11 Human Capital per Unit Labor

Lawrence J. Lau, Stanford University12 Sources of Economic Growth with Explicit Inclusion of Human Capital

Lawrence J. Lau, Stanford University13 The Effects of Human Capital Microeconomic Studies u Wage function studies u G. Psacharopoulos (1981), "Returns to Education: An Updated International Comparison," Comparative Education Review, 17: u G. Psacharopoulos (1985), "Returns to Education: A Further International Update and Implication," Journal of Human Resources, 20: u Production function studies u Jamison and Lau (1982), Farmer Education and Farm Efficiency, Baltimore: Johns Hopkins University Press. u Profit function studies u Technology adoption studies

Lawrence J. Lau, Stanford University14 Problems of Wage Function Studies u 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. u Problems of interpretation (does education matter?): u 1.The Screening Hypothesis (including signaling and sorting) u 2.Self-selection u 3.Credentialism u 4.Possible networking benefits

Lawrence J. Lau, Stanford University15 The Effects of Human Capital Macroeconomic Studies u Aggregate production function studies

Lawrence J. Lau, Stanford University16 Problems of Macroeconomic Studies u Multicollinearity with time and other variables

Lawrence J. Lau, Stanford University17 R&D Capital u A source of technical progress

Lawrence J. Lau, Stanford University18 The Case for Investment in R&D in Developing Economies (1) u Essentiality of indigenous R&D for the successful exploitation of imported technology, e.g., new rice variety u 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 u Licensing frequently takes the form of cross-licensing u R&D projects as an instrument of industrial policy (Strategic R&D)

Lawrence J. Lau, Stanford University19 The Case for Investment in R&D in Developing Economies (2) u 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

Lawrence J. Lau, Stanford University20 Characteristics of R&D Projects u High risk u Long gestation period u “Lumpiness”--critical mass required u Possible non-appropriability of benefits

Lawrence J. Lau, Stanford University21 The Case for Public Support u Non-appropriability--social rate of return greater than private rate of return u Size distribution of firms u Non-availability of venture capital

Lawrence J. Lau, Stanford University22 Investment in R&D Capital in the East Asian Economies (1) u Government support u 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) u In addition, in these countries, as well as in South Korea, the government provides tax and other incentives for private R&D u Protection of intellectual property rights has been significantly strengthened

Lawrence J. Lau, Stanford University23 Investment in R&D Capital in the East Asian Economies (2) u Japan’s Experience u Taiwan’s Experience u The personal computer industry in Taiwan provides a successful example of government-financed R&D as an instrument of industrial policy u The semiconductor industry u South Korea’s Experience u In South Korea, the chaebols (large conglomerates) with “deep pockets”, such as Samsung and Hyundai, invest heavily in R&D

Lawrence J. Lau, Stanford University24 R&D Expenditure as a Percentage of GDP

Lawrence J. Lau, Stanford University25 R&D Capital

Lawrence J. Lau, Stanford University26 R&D Capital Stock per Unit Labor

Lawrence J. Lau, Stanford University27 Sources of Economic Growth with Explicit Inclusion of Human and R&D Capital

Lawrence J. Lau, Stanford University28 Investments in Other Forms of Intangible Capital u Design--development of core competence (out-sourcing wherever possible and justified) u Goodwill u Advertising u Brand names--Japan is the only country which has consistently and successfully developed brand names (Lexus, Shiseido, Sony) u Market development u Distribution systems u Information System and Software

Lawrence J. Lau, Stanford University29 The Role of Intangible Capital u Different types of measured inputs play different roles at different stages of economic growth u Tangible capital accumulation is the most important source of growth in the early stage of economic development u But simply accumulating tangible capital is not enough--it must also be efficiently allocated u Efficient tangible capital accumulation is the major accomplishment of the East Asian NIEs u Intangible capital accumulation becomes important only after a certain level of tangible capital per worker is achieved

Lawrence J. Lau, Stanford University30 Investment in Intangible Capital in Developing Economies u (1) Tangible capital accumulation is critical in the early stage of economic development u (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 u (3) Because of its complementarity with tangible capital, investments in intangible capital can retard the decline in the marginal productivity of tangible capital u JAPAN HAS SHOWN HOW THIS CAN BE DONE!

Lawrence J. Lau, Stanford University31 Implications for Developing Economies u Closing the gap on intangible capital u Investment in Human Capital (formal, technical, on-the-job training, and re-training) u Investment in R&D Capital u Investment in other forms of Intangible Capital (Design, Market Development, Information System and Software, Etc.) u Protection of intellectual property u Maintaining and creating competitive advantage

Lawrence J. Lau, Stanford University32 The Possible Role of Governments of Developing Countries in R&D u Focus on development rather than basic or applied research u Consortium approach u Standardization and grading u Quality assurance