Human Capital and Growth of Industries: Evidence from China's Higher Education Expansion in the Late 1990s

Abstract

Human capital is indispensable for firms in developing countries to adopt new technologies and improve productivity, especially in industries that employ technologies more complementary to skilled labor, given that new technologies available after the 1970s tend to be skill-biased. Taking advantage of an exogenous surge in college-educated labor force in China starting in 2003 due to a drastic centrally-devised higher education expansion policy starting in 1999 and using a generalized difference-in-differences framework, this paper finds that industries that employ more human-capital intensive technologies experience a larger gain in total factor productivity post-2003 relative to prior years; they also show larger increases in import of advanced capital goods, R&D expenditure, capital intensity, employees with more education and in skilled occupations, and total value-added. The extra productivity gains however are much weaker for domestic private firms than foreign-owned firms.