1. Expansion of Firms and Human Capital Accumulation by Training: A Growth Model for the Not-So-Growing
Midwest International Economics conference
Gilad Aharonovitz
Washington State University
School of Economic Sciences
October 2008

2. Roadmap Introduction - development and existing growth theory:
Endogenous growth literature
Human capital literature
Development model based on accumulation of human capital through on-the-job training
Model
Development phases
Extensions
Capital flows – model and empirics
Summary

3. Introduction Development problems and growth theory
Poverty traps are rejected: Easterly (2006, 2007)
Capital accumulation: Solow (1956)
But: Lucas (1990)
Endogenous growth literature: Romer (1990), Grossman and Helpman (1991), Aghion and Howitt (1992) and Aghion et al. (2001).
North-South: Krugman (1979), Acemoglu and Zilibotti (2001).
Human capital: Mincer (1962), Becker (1964).

4. Introduction
Human capital and growth: Lucas (1988), Romer (1989), Becker, Murphy and Tamura (1990), Stokey (1991), Mankiw, Romer and Weil (1992), Barro (2001), Eicher and Gracia-Penalosa (2001) and Galor and Moav (2004)
But: schooling is about the demand for education.
Exceptions:
Galor and Tsiddon (1997)
Lucas (1988)
Burstein and Monge-Naranjo (2007), Monge-Naranjo (2007)

5. Introduction Motivation
Lucas (1978) acknowledges the need for managers
Firm literature (Coase, 1937, Penrose, 1959) acknowledged the need for training.
World Bank enterprise survey – most firms train workers, many firms regard skills of workers as an obstacle for expansion.
This paper: on-the-job training based development, in an environment in which the technology and the production function are already given, and the economy needs to utilize it.

6. The Model Two sectors, traditional and technological.
In the technological sector, every production unit (firm) is headed by a manager.
Firms train managers in order to increase profitability.
Managers can later open their own firms \ train other managers.
: traditional sector’s workers, technological sector’s workers and tech. sector’s managers = population size

7. The Model
Traditional sector: constant marginal productivity, equals 1.
Technological sector: production units,
Standard production function.
l includes the manager. No capital.
Training managers:
Each existing unit can train managers at a cost:
Allows to open more production units in the same period.
Newly trained managers can train after one period.

8. The Model But: managers can leave after one period.
Managers are paid a worker’s wage at the training period.
Timeline:
Pre-trained managers are running the firms-production units.
Each firm decides how many managers to train (and units to open , workers to hire)
The rest of the population work in the traditional sector, production and consumption take place.
Example

9. Development Path – First Phase
The traditional sector still exists
One firm is introduced to the economy.
w=1 as long as the traditional sector exists.
is set (diminishing marginal productivity)
Profits per firm (excluding pre-trained manager’s wage):
Proposition 1: Growth rate of the technological sector is constant without externalities, and increases over time with positive externalities.

10. Development Path – First Phase
Proposition 1: Growth rate of the technological sector is constant without externalities, and increases over time with positive externalities.
Example:

11. Development Path – Second Phase
The traditional sector disappears
Firms are hiring fewer workers – wage increases:
Workers: Wage:
Proposition 2: second phase growth rate is diminishing without externalities, and may diminish, stay constant, or increase with externalities.

12. Development Path – Second Phase
Since each firm is small, it can neglect its own effect over Mt
Growth rate is lower than m
Development ceases eventually (i.e., catch-up).
Example:

13. Development Path
Output and Managers throughout the Development Process

14. Development Path - Extensions
Paying to be trained:
Assume bounded price / time period
Firms train more managers
Price of training is (weakly) decreasing over time
Same pattern of development.
Firm specific skills:
Firm specific skills -> one large firm.
Span of control problems / diffusion of skills
Monopolistic competition
Schooling as a pre-requisite for training.
Heterogeneous ability

15. Evolvement of Income Inequality
Gini index throughout the Development Process

16. Capital Flows Production function of a unit:
Firms can rent capital locally or abroad (r), agents can save (s)
Cost of training:
Workers and capital decisions:
Managers’ training decision:

17. Capital Flows Capital demand: Local supply:
Net capital position (foreign ownership):
Capital flow – change in KNP
Proposition: the economy experience capital inflows that later reverse to capital outflows.

18. Net Capital Position and Net Capital Flows over Time
, , r=0.1, s=0.2, and N>62,261

19. Net Capital Flows and Output
, , r=0.1, s=0.2, and N>62,261

20. Capital Flows FDI Regression Analysis
Dependent Variable: FDIpc1990_2003
(1)
(2)
(3)
FDIpc1980_1989
1.025
(9.18)**
GDPpc1989
27.086
36.417
(3.13)**
(4.00)**
GDPpc1989sqr
-1.411
-1.486
(4.43)**
(5.03)**
CapitalForm1980
(2.04)*
CapitalForm1980sqr
0.537
(2.65)**
Latitudesqr
-0.079
(2.49)*
Constant
19.517
15.110
(1.17)
(0.45)
(1.56)
R-square
0.56
0.32
0.49
Observations 69 76 75

21. Capital Flows
FDI Regression (2)

22. Summary and Conclusions
This paper developed a highly stylized general equilibrium development and catch-up model.
Mangers and firms are scarce resources in less developed countries, the model is suitable for the development analysis.
The analysis stresses two problems
Accumulation of human capital: training vs education
Dependence of development on behavior of firms.
Policy
Aid to the traditional sector
Supporting education
Capital flows – absorption capacity