The Importance Of Human Capital For Developing Countries

1. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
THE IMPORTANCE OF HUMAN CAPITAL FOR DEVELOPING
COUNTRIES
Assc. Prof Dr Suriyani Muhamad
School of Social and Economic Development
University Malaysia Terengganu, 21030 Kuala Terengganu,
Terengganu, Malaysia
Email: suriyani_md@umt.edu.my, Tel: 09-6683920
Nor Fatimah Che Sulaiman
School of Social and Economic Development
University Malaysia Terengganu, 21030 Kuala Terengganu,
Terengganu, Malaysia
Email: n.fatimah@umt.edu.my, Tel: 09-6683920
The objective of this study is to investigate the effects of human capital capacity on economic
growth in developing economies in the Asia Pacific. This is examined at the cross country level by
using a number of alternative variables to proxy for human capital capacity. The educational
challenges facing developing economies due to resource constraints are considerable. Due to the
renewed efforts made by these economies to increase enrolment ratios and allocate resources
efficiently, the quantity dimension of human capital in this study is proxied by secondary and
tertiary enrolment ratios, total labor force, and government expenditure on education. The method
used in this analysis is panel data analysis using Pooled Ordinary Least Square (OLS) approach.
The human capital data are collected by using data from the World Development Indicators
Report. The secondary data was collected from the years 2005-2009, a period of five years. The
six countries selected in this paper are developing countries in the Asia Pacific, namely China,
Indonesia, Malaysia, Philippines, Thailand and Vietnam. The results of this study suggest that
education policy that focuses on improving enrolment ratios and government expenditures
directed at improving the quality of education can optimize growth outcomes.
Field of Research: Human Capital Capacity, Economic Development.
INTRODUCTION
The development of a nation will not be successful without human beings acting as major players,
and there lies a concept of human capital within the human himself. Naisbitt, Naisbitt, and Philips
(1999) opined that technological and knowledge growth are not beneficial unless related to human
beings. Academic research in the last three decades has been unambiguous in pointing out that
human capital is a fundamental driver of regional economic growth. Faggian and McCann (2009)
have rightly noted that this conclusion has arisen because there is an increasing recognition that
knowledge is the key force responsible for growth in most modern regional economies and that
highly skilled workers are the key providers of this knowledge.
Human capital means empowering humans with all the knowledge and skills needed to survive in
a society that continuously changes. There are a myriad of ways to define human capital. Human
capital is a concept that encompasses many dimensions and acquiring points, making it quite a
complex phenomenon (Natoli 2008). The Commission of the European Communities (2003)
defined human capital as “knowledge, skills, competencies and attributes embodied in individuals

2. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
which facilitate personal, social and economic well-being.” Human capital has certain underlying
characteristics, since it is embodied in humans (Natoli 2008).
First, this study seeks to investigate the effects of human capital capacity on economic growth.
This is examined at the cross country level by using a number of alternative variables as proxies
for human capital capacity. The educational challenges facing developing economies due to
resource constraints are considerable. Due to the renewed efforts made by these economies to
increase enrolment ratios and allocate resources efficiently, the quantity dimension of human
capital in this study is proxied by secondary and tertiary enrolment ratios, total labor force, and
government expenditure on education. The results of this study suggest that education policy that
focuses on improving enrolment ratios and government expenditures that are directed at the
quality of education can optimize growth outcomes.
IMPORTANCE OF SKILLED HUMAN CAPITAL
The national innovation system in developed countries focuses on flows of knowledge.
Knowledge, embodied in this study as human capital and in technology, has always been central to
economic development. Only over the last few years has its relative importance been recognised,
just as that importance is growing. Economic activities are becoming more and more knowledge-intensive,
as seen in the growth in high-technology industries and the increasing demand for
highly skilled people. Investments in knowledge, such as in research and development, education
and training, and innovative work approaches, are considered as key to economic growth.
For example, Japanese innovation came from very strong social and education institutions.
Innovation is due to the mindset of the people and how they successfully translated ideas into
blueprints, prototypes, working technologies, and scientific discoveries (Marinova, 1999). Japan’s
innovativeness was helped by the fact that many Japanese received higher education, particularly
in science and engineering, or high-quality industrial training at the enterprise level, and that
employment has broken down the barriers between blue-collar and white-collar work.
Another example is Korea, which has emerged as one of the most innovative nations in the world
in such a short period of time. One of the contributing factors for this rise is related to human
capital. Korean industries have been able to increase RD investments rapidly, thanks to the
abundant pool of well-educated human resources. In both developed and developing countries,
RD investment is constrained more by a lack of human resources than by a lack of financing.
Korea prepared itself well for economic development by investing heavily in education and human
resource development. Reflecting the investment in education, the school enrolment rate at the
tertiary level in Korea increased from 16 percent in 1980 to 37.7 percent in 1990 and to 52.5
percent in 2000 (OECD 2008a).
LACK OF QUALITY IN HUMAN CAPITAL, SKILLS, AND HIGHER EDUCATION IN
DEVELOPING COUNTRIES
While the study on the NIS concept as a whole is still at the early stage, the study on NIS in
developing countries is at an even more primitive stage. Most of research concentrates on how
institutions and systems were built and shaped to produce ‘intensive learning,’ which facilitated
technological catching-up processes in newly industrialising economies in Asia, such as in Korea,
Taiwan, and Singapore (Kim, 1993; Hou and Gee, 1993; Wong, 1996; Wong, et al., 1999).
Arocena and Sutz (1999) further point out that industrial innovation in developing countries is
highly informal, i.e. not products of formally articulated RD activities. In addition, the dominant
cultural patterns of these countries undervalue scientific knowledge and technological innovation.

3. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
Skills play a crucial role for innovation. Low educational attainment and the lack of quality and
capacity of the educational sector at all levels, including vocational training and adult education,
can hold back innovation. With limited budgets for education, one difficulty is in striking the right
balance between the training of high-skill specialists–which is costly and often concentrated in a
few disciplines, but essential for the promotion of innovation at the international level–and
training at the primary and secondary levels, which, if absent, reduces the absorptive capacities of
the economy and the development of grassroot businesses.
For example, Indonesia has made relatively slow progress on increasing enrolments in secondary
and tertiary education. As for many other countries, there are systematic differences in access to
education between the rich and the poor across all levels of education, particularly at the tertiary
level. However, poverty and low educational attainment are strongly correlated in Indonesia.
According to the World Bank (2010), in terms of innovation, the available evidence indicates that
Indonesia’s higher education system is being outpaced by the progress of many of its neighbours,
such as Malaysia and Singapore, particularly in terms of patents granted and the number of
researchers.
Inadequate human capital in Thailand represents another example of a constraint to innovation.
The major problem is the inability of educational institutes to produce enough Science
Technology (ST) graduates with appropriate skills and quality that match private sector needs.
Thailand does well on access to primary and secondary education, where enrolment rates are high.
National expenditure on education and access to secondary and tertiary education are adequate and
in line with regional peers. However, Thailand is still lagging in math and science scores and
innovates less than countries with comparably higher education ratings. At present, there are 24
public universities and 50 private universities in Thailand. Altogether Thailand has the capacity
for educating 1.1 million students, but most are concentrated on social science and humanities
areas. The quality of the universities themselves and their graduates are not high compared to
those of other universities in Asia. Their research capabilities are generally unsatisfactory.
Malaysia lags behind developed countries such as Singapore and Hong Kong in terms of the
education and skill level of its labour force. From 1970s onwards, Malaysia has invested heavily
in human capital. The government focused on primary and secondary education levels before
embarking on transformation of higher education to satisfy increased demand for skilled labour.
Despite of these efforts, the quality of education remains below other comparable economies. The
supply of skilled labour in Malaysia is still in shortage. Due to Malaysia’s foreign policy, firms are
able to employ cheap unskilled foreign workers, while the current wage structure does not
encourage employees to upgrade their skills. Due to limited financial resources and human
resource personnel, firms have difficulties in sourcing and planning training programs for their
employees. At the same time, the number of skilled expatriates working in Malaysia has declined
in recent years, limiting opportunities for leveraging their knowledge and technological
capabilities. The result is a very tight market for skilled labour.
Investment in human capital should go hand-in-hand with the creation of job opportunities.
Otherwise, well-qualified professionals are likely to contribute much less to boosting development
as they suffer from underemployment. Finally, the international dimension is important for many
developing and emerging economies as a source for capacity-building—for instance, by sending
students and researchers to foreign universities. It can, however, also be a threat since the most
skilled might choose to stay abroad if local circumstances do not provide sufficient opportunities.
Improving local research and employment conditions for the highly skilled is essential to avoid
emigration of the brightest.

4. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
RESEARCH METHODOLOGY
Data Sources
Annual GDP per capita data can be collected from the annual reports of the World Bank. Human
capital data can be collected by using data from the World Development Indicators Report. Total
labour force (economically active population), education expenditure (percentage of GNI),
secondary school enrolment, and tertiary school enrolment (percentage gross) are indicators of
human capital education. The secondary data was collected from the years 2005-2009, a period of
five years. The six countries selected in this paper are developing countries in the Asia Pacific,
namely:
1. China
2. Indonesia
3. Malaysia
4. Philippines
5. Thailand
6. Vietnam
Research Analysis
The method that used to examine the relationship between human capital and economic
development was panel data analysis. Panel data (also known as longitudinal or cross sectional
time-series data) is a dataset in which the behaviour of entities are observed across time. These
entities can be states, companies, individuals, or countries.
Panel data allows you to control for variables you cannot observe or measure, like cultural factors
or differences in business practices across companies. It also allows you to control for variables
that change over time, but not across entities (i.e. national policies, federal regulations,
international agreements, etc.). This accounts for individual heterogeneity. With panel data you
can include variables at different levels of analysis (i.e. students, schools, districts, states) suitable
for multilevel or hierarchical modelling. Some drawbacks of panel data are data collection issues
(i.e. sampling design, coverage), non-response in the case of micro panels, and cross-country
dependency in the case of macro panels (i.e. correlation between countries).
The (pooled) OLS is a pooled linear regression without fixed or random effects. It assumes a constant
intercept and slopes regardless of the group and time period. If individual effect ui (cross-sectional or
time specific effect) does not exist (ui=0), ordinary least squares (OLS) produces efficient and
consistent parameter estimates.
These hypotheses were developed to answer the research question:
A higher level of human capital has a positive effect on the level of economic development.
Ha. Secondary enrolment positively affects economic development.
Hb. Tertiary enrolment positively affects economic development.
Hc. Education expenditure positively affects economic development.
Hd. Total labor positively affects economic development.
The important factors in strengthening human capital, which will foster economic development,
were then assessed using the following regression equations:
GDPit= 0 + 1ERSRYit + it
GDPit= 0 + 1ERTRYit+ it
GDPit= 0 + 1PEXPit+ it
GDPit= 0 + 1LBORit+ it

5. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
Where:
Dependent variable:
GDPit= the level of economic development
Independent variables for each equation:
ERSRYit = Secondary school enrolment (percentage gross)
ERTRYit= Tertiary school enrolment (percentage gross)
PEXPit= Education expenditure (percentage of GNI)
LBORit = Total labour force (economically active population)
it= Disturbance term
RESULTS AND DATA ANALYSIS
Descriptive Analysis
Descriptive analyses of frequencies, minimum, maximum, mean, and standard deviation were
used to summarize the profile of the research data. The summary statistics are displayed in Table 1
below.
Table 1: Summary statistics
Variable Observation Mean Standard
Deviation
Min Max
GDP PER
CAPITA
SECONDARY
ENROLMENT
TERTIARY
ENROLMENT
EDUCATION
EXPENDITURE
TOTAL LABOR
30
30
30
30
30
4.13127
1.948808
1.592336
0.5323069
7.191427
0.4479533
0.0858786
0.2617042
0.152773
0.8567192
3.331022
1.782761
1.19559
0.2568644
5.2432
4.696697
2.11133
2.016501
0.8292504
8.899755
Pooled Ordinary Least Square
The results from the panel data analysis using pooled OLS are summarized as Table 2 below.
From the table it can be seen that all four human capital capacity variables used in this paper
showed significant results with economic development.
Table 2: Pooled ordinary least square analysis result
HYPOTHESIS COEFFICIENT t-VALUE P SIGNIFICANT
Ha
3.469989
7.29
0.000
YES

6. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
Hb
Hc
Hd
1.133807
1.029677
-0.3889368
7.10
3.08
-7.88
0.000
0.003
0.000
YES
YES
YES
DISCUSSION AND CONCLUSION
From the above table, we can conclude that economic development is significantly related to
secondary enrolment, tertiary enrolment, total labour, and education expenditure, which
represented human capital capacity.
There are several limitations in this study for example to measure human capital capacity, as one
of the key themes of the study, author only used four variables namely, secondary school
enrolment, tertiary school enrolment, education expenditure and total labor. Prior research has
used a number of proxies to operationalize this construct including managerial and entrepreneurial
experience, level of academic education, vocational training, age, and income among others (Hinz
and Jungbauer-Gans 1999, Kilkenny et al. 1999, Guzman and Santos 2001). Consequently, the
measure does not fully capture prior experience and vocational training that have been advanced
as proxies for human capital. Therefore, future research may include other relevant human capital
variables to this study. Besides, this study has included the panel data from 2005-2009 and only 6
countries involved in analysis of data. As one example of suggestion, future research may include
a larger sample of data for example longer time series and larger sample of countries could extend
upon the current result.
As for research findings, we can conclude that all four variables, secondary enrolment, tertiary
enrolment, total labour, and education expenditure that have represented human capital capacity is
significantly related to economic development in these six countries; China, Indonesia, Malaysia,
Philippines, Thailand and Vietnam.
It has been proven that the human capital theory and educational systems work beautifully for the
development of individuals and nations, especially developing nations. However, there are
implications involved, especially in relation to the differences in policies and expenditures in
education. The human capital theory emphasizes the need for policy makers to allocate significant
resources to the expansion of educational systems. While some governments may be reluctant to
invest in education, the positive returns from this investment will significantly outweigh the costs.
Many of the developing nations have thus realized that the principal mechanism for developing
human knowledge is the education system. Thus, they invest huge sums of money on education,
not only as an attempt to impact knowledge and skills to individuals, but also to impart values,
ideas, attitudes and aspirations which may be in the nation‘s best developmental interest.
In conclusion, after all of the analyses, this paper found the answer to the research question, which
was to determine whether skilled human capital is a crucial element for economic growth. It can
be concluded that skilled human capital makes a great contribution to the economic growth and
development of an economy or of the world as a whole. Developing economies have to be more
creative and innovative in order to improve their positions in the world economy and to become
developed economies in the near future.

7. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 4 (KLIBEL4)
Vol. 2. 31 May – 1 June 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-3-7
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