Human capital, institutional quality and industrial upgrading: global insights from industrial data

Abstract

The tendency for human capital to accumulate and for institutional quality to improve as countries develop is well documented. This paper investigates the association of these changes with the evolution of industrial structure toward greater manufacturing sophistication. The empirical analysis is based on a newly constructed panel dataset for 15 industrial categories in 92 countries over the period 1970–2010. The results suggest that the extent to which increased tertiary human capital promotes industrial upgrading is contingent on the level of institutional quality, as measured by an index over size of government, legal structure, access to sound money, freedom to trade and market regulations. Institutional quality is found to be complementary to tertiary human capital in promoting the relative growth of advanced manufacturing.