Essays on Human Capital, Innovation, and Growth with Heterogeneous Abilities

UoM administered thesis: Phd

  • Authors:
  • King Yoong Lim


The critical role of human capital in promoting innovation-driven growth has long been recognised, though when in the presence of heterogeneous abilities among individuals, its complex interactions with other cross-cutting factors in an economy are less understood. A rigorous examination of these links is important towards gaining better understanding of externalities among policies, notably in the context of real-world policymaking where reforms are often implemented in packages. This thesis examines the links of human capital (with heterogeneous abilities), growth, and two such policy areas, foreign direct investment (FDI) and labour market reforms, using multisectorial endogenous growth models. Chapter 1 develops an imitation-innovation (continuous time) growth model with heterogeneous labour and foreign multinationals (MNCs) to examine industrial transformation for a developing host economy. With FDI modelled at the disaggregated level of foreign experts, we formalise a MNC composition-determination framework that explains Dunning's `internalisation advantage' (1977) as being driven by the presence of asymmetric views on productivity of domestic workers. Specifically, foreign experts perceive heterogeneity among the productivity of domestic workers. As productivity is a transformation of ability, this allows us to link the skills acquisition decision and foreign subsidiaries' operational mode choice along the same ability distribution in the host economy. In addition, asymmetry is also introduced specifically for Vertical MNCs to capture the increasingly costly nature for foreign experts to identify the best among the most productive workers in a host economy. Calibrated for Malaysia, these novel features enable the model to generate simulation results that are consistent with some stylised observations documented in the FDI literature, and uncover complementarities between human capital and FDI-promoting policies. These complementarities are stronger with endogenous technological change. In Chapter 2, the effects of labour market reforms are studied in an innovation-driven, overlapping generations (OLG) model of endogenous growth with a heterogeneous labour force, labour market rigidities, and structural unemployment. The model is parameterised for stylised high- and middle-income economies and used to perform a range of experiments, including both individual labour market reforms (cuts in the minimum wage and unemployment benefit rates) and composite reform programmes involving additional measures. The results show that individual reforms may generate conflicting effects on growth and welfare in the long run, even in the presence of positive policy externalities. A reduction in training costs may also create an oversupply of qualified labour and higher unemployment in the long run. Public investment in infrastructure, partly through its productivity effects on innovation, can help to mitigate this oversupply problem. In short, the studies in these two chapters show that, when the supply side of the labour market is explicitly modelled by introducing heterogeneous abilities, promoting innovation-driven growth is no longer a straightforward reform provision of "throwing everything at the wall to see if it sticks", as there are much more complex interactions in terms of policy externalities to be understood.


Original languageEnglish
Awarding Institution
Award date31 Dec 2017