Human Capital, Technological Spillover and Productivity of Manufacturing Sector: A Comparative Analysis of Pakistan and India

Abstract

The most important macroeconomic goal for a developing country is to achieve the accelerated and sustained economic growth. In pursuance of this, creditable objectives and identification of the variables which are capable of accelerating growth are needed. Total factor productivity (TFP) is considered as one of the contributory factors for economic growth. TFP is measured as residual using the Growth Accounting approach. The Solow’s residual accounts for the portion of output could not be explained by the growth of inputs. Increased productivity level is a prerequisite to attain higher level of output for the same level of input. The research has been conducted in subcontinent for exploring the role of human capital in increasing the productivity however the role of technological spillovers has not been investigated in detail, specifically in case of Pakistan. In this background the study investigated the impact of human capital and technological spillovers on manufacturing productivity for both India and Pakistan using time series data from 1980-2014. Johanson’s Co-integration Approach and Vector Error Correction Model(VECM) were employed to investigate the long run and short run relationship among the variables. The results reveal the existence of long run relationship among Human Capital, Research & Development (R&D) Expenditure and TFP variable. The estimated results of the models show the positive significant influence of human capital and technological spillover on manufacturing productivity for both countries. The positive and significant coefficients imply that investment in human capital, R & D Expenditure and Technical Cooperation Grants resulted in increased productivity.  So there is need to devise the policies for the development of human capital and enhancing Research & Development expenditure over time.