Human Capital Formation, Learning and Growth in Open Economies

Abstract

During the last decades two factors have been recognised as major deten-ninants of economic growth. Firstly, the ongoing integration of international capital markets has rendered foreign physical capital a crucial factor in the performance of open economies. Secondly, in addition to greater capital mobility, there has been an increasing awareness among economists that economic growth swivels around the production and use of knowledge. The connections relating those two crucial factors (i. e. physical capital mobility and knowledge production) have been, however, seldom explored in the relevant literature. This is an important omission which we seek to remedy in this thesis. The main objective of this dissertation is, essentially, to explore the joint role of physical capital and knowledge accumulation in the economic growth process, when physical capital mobility exists. Another important objective is to study the role of knowledge accumulation in attracting foreign physical capital. For this purpose, we advance two theoretical models of growth to explore these connections, from an exogenous and an endogenous point of view respectively. An empirical application complements the theoretical approach concentrating on the long-term linkages between human capital accumulation and physical capital movements. The thesis comprises three chapters. In Chapter I we construct a two-country Solow-Swan growth model in which 'knowledge production' is treated as pure human capital accumulation. In this model, physical capital moves freely across borders and human capital is immobile, whilst the interest rate is determined endogenously. In Chapter 2 we develop a two-country endogenous growth model with capital flows. This time, 'knowledge production' is achieved by means of a learningby- doing process in both countries, this being a side-effect of world physical capital accumulation. Once again, physical capital is mobile between countries, whilst labour is immobile, and the interest rate is determined endogenously. in Chapter 3 we build on the connections between knowledge production and physical capital accumulation explored theoretically in previous chapters. Essentially, we investigate the extent to which human capital differences across countries could account for differences in physical capital inflows, after controlling for other factors. The main result obtained throughout our investigation is the confirmation of the existence of strong links relating knowledge production to international capital flows. Both theory and data seem to strongly support this conclusion.