Research Proposal

Impact of historical level of HDI on contribution of R&D expenditure towards labour productivity

Introduction:

Labour productivity, defined as output per labour-hour is an important determinant of how an

economy is performing and its long term performance outlook. The three major factors determining
the level of labour productivity are: 1) Investment in capital, 2) Human capital development and 4)
Technological progress. The role of these determinants and their optimum utilization to improve the
level of labour productivity has been an active area of research both in Growth Economics and
Management theory. However, contributions of these factors, in light of historical level of social
development is a potential area for further investigation.

This proposed research work will be an attempt towards understanding the contributions of these
mentioned factors in influencing the growth of labour productivity, light of historical HDI level in a
country. The objective will be to verify the hypothesis that historical level of HDI in a country
influences the effectiveness of expenditure on R&D and research propensity among citizens of a
country. The factors influencing the growth of labour productivity in countries with low, medium and
high HDI levels respectively are to be identified and the respective contributions of those factors will
be studied through multiple regression analysis.

Objective:

This research will try to investigate following questions:

1) Do the factors have similar contributions in determining the level of labour productivity
irrespective of historic HDI level?

2) If there are differences in weightage, then what are prime areas for low HDI countries to focus
on?

3) What are implications for firms in their efforts to improve labour productivity?

Literature Review:

There have been many studies conducted over the years investigating the growth of labour
productivity and relevance of factors contributing to it. Several factors have been identified that
contribute towards growth of labour productivity, namely, capital stock, development if human
capital and technological progress. Management theories have focused on improving quality and
motivation of human capital, division of labour and process refinement as key drivers at firm level,
with notable contributions from Frederick Taylor (1911) and Henri Fayol (1916). Henry Ford (1922)
was instrumental in implementing mass production by improvement in technology through use of
assembly lines, as well as improving quality and motivation of human resource through higher wages
and reduced work hours. Emphasis on these factors have continued in modern era in management
practices with ICT revolution.

Some of the most influential research in the area from standpoint of growth economics is by Robert
Solow and Trevor Swan (1956) in exogenous growth theory that explains technological progress
being governed through external influences. On the contrary, endogenous growth theory considers
technological progress as governed by internal factors of the economy. Major contributions in
endogenous growth theory are from Arrow (1962), who argued that at any moment, new capital
goods incorporate the accumulated experience. Romer(1986), who considered creation of
knowledge as a spill-over of investment, and Lucas (1988), who argued that investment in education
leads to growth of human capital, which leads to technological progress.

The hypothesis that factors may have varying contribution depending on quality of human capital
comes from these endogenous growth theories that stress on the importance of human capital as a
standalone factor for growth, as well as influencing technological advancements. In a study by Erdil
et al, the relationship between labour productivity and R&D expenditure was analysed for 22 OECD
countries during the period 1991-2003, yielding a positive long-run effect of R&D on labour
productivity growth. In a similar study by Walter McMahon, the impact of education was studied
over 15 OPEC nations, showing a positive result again.

HDI has been accepted as an indicator for human development across the world, and is an index that
incorporates information about 1) Life expectancy at birth, 2) Mean years of schooling and 3) GNI
per capita, thus providing a reflection of quality of life for an average citizen of the country. It is
considered as a segregator so as to clearly differentiate the quality of human capital of countries
under study initially.

Methodology:

To investigate the proposed questions, relevant data will be collected for a set of 72 countries, the
countries will be divided into high, medium and low HDI countries, with 24 countries in each set
( base year 2005 ) to find if the influencing factors are different for each set.

The 3 sets are defined as follows:

a) High HDI : 1.000 – 0.700

b) Medium : 0.699 – 0.550
c) Low : 0.549 – 0.350

Multiple regression analysis will be conducted on this data for identifying the contribution of
identified independent variables.

Dependent variable: Labour Productivity.

Independent variables:

1) R&D expenditure growth:

2) Papers per million population
3) Patent per million population
4) Capital growth rate
 5) Growth in life expectancy at birth
6) Growth in mean school years

Data Analysis:

1) Data will be collected for selected countries for identified variables

2) Data will be analysed to detect anomalies such as heteroscedasticity, multicollinearity and
autocorrelation
3) Data will be analysed for identifying variance between the three groups in terms of central
tendencies
4) The data will now be regressed to find significance and contribution of each independent
variable

References:

1) Journal of Economic Perspectives—Volume 22, Number 1—Winter 2008—Pages 3–24)

2) http://www.imedpub.com/articles/technology-and-education-effects-on-labor-productivity-
in-the-agricultural-sector-in-iran.pdf
3) Economics of Education Review, Volume 3, Issue 4, 1984, Pages 299-313,Walter
W.McMahon
4) R&D and Productivity: A Two Way Avenue?, July 2011World Development 39(7):1090-1107
5) DOI: 10.1016/j.worlddev.2010.11.006,SourceRePEc,Claudio Bravo-OrtegaClaudio Bravo-
OrtegaAlvaro GarciaAlvaro Garcia
6) http://www.oecd.org/investment/statistics.htm
7) https://economics.columbian.gwu.edu/sites/g/files/zaxdzs1936/f/downloads/samaniego_su
nstages.pdf
8) https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/329-
2017_crafts.pdf
9) https://research.stlouisfed.org/publications/economic-synopses/2015/02/27/measuring-
labor-productivity-technology-and-the-labor-supply/