The Spillover Effects of Innovative Ideas on Human Capital

This paper extends a two-period Overlapping Generations model of endogenous growth
where the interactions between public infrastructure, human capital with R&D activities,
and growth are studied. The paper makes two important contributions. First, it accounts
for the spillover effect of the stock of ideas on learning which in turn promotes the
production of innovative technologies. In doing so, it brings to the fore a two-way
interaction between human capital and innovation. The paper then applies various
econometric methods which confirm the above theoretical thesis. Second, the solutions
of the model emphasise the important role public spending on infrastructure, human
capital and R&D can play in promoting economic growth. In order to study the
transitional dynamics of the model and to illustrate the impact of public policy, the model
is calibrated using the average data for low-income countries and a sensitivity analysis is
reported under different parameter configurations. The findings of the numerical analysis
show that trade-offs in the allocation of public spending may inevitably emerge. In
particular, investment in public infrastructure at the expense of spending on R&D is less
likely to succeed in promoting economic growth, whereas it may be more effective to
foster growth through an offsetting cut in another productive component, namely,
education. In light of these potential trade-offs, governments in low-income countries
need to use their limited budgets as part of holistic measures in order to achieve efficient
outcomes.