Accumulating human capital: Corporate innovation and firm value

• Published date: 01 December 2023
• Author: Xun Wang,Jingwen Yu
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/irfi.12422

ORIGINAL ARTICLE

Accumulating human capital: Corporate

innovation and firm value

Xun Wang

1

| Jingwen Yu

2

1

China Center for Economic Research,

National School of Development, Institute of

Digital Finance, Peking University, Beijing,

China

2

Center for Economic Development Research,

Economics and Management School, Wuhan

University, Wuhan, China

Correspondence

Xun Wang, China Center for Economic

Research, National School of Development,

Institute of Digital Finance, Peking University,

Beijing, China.

Email: xunwang@nsd.pku.edu.cn

Abstract

We empirically document that industries that are more

R&D intensive exhibit disproportionately greater innovation

quantity and better innovation quality in economies with

more human capital. Firm-level evidence confirms that inno-

vation is an important channel through which firm responds

to labor market conditions. Further analyses show that in

economies with greater human capital, firms better able to

innovate exhibit larger increase in labor productivity and

capital–labor ratio, an effect driven by deceases in employ-

ment and increase in intangible capital investment. By facili-

tating the adjustment in input mix and capital structure,

human capital accumulation allows firms with high innova-

tion ability to enhance firm equity value and improve firm

performance.

KEYWORDS

entrepreneurship, firm value, human capital, innovation,

productivity

JEL CLASSIFICATION

E24, G32, L60, O15, O30

1|INTRODUCTION

An extensive literature documents that human capital plays an important role in promoting productivity growth and

explaining cross-country differences in economic performance (Acemoglu et al., 2014; Barro, 1991; Gennaioli

et al., 2013; Glaeser et al., 2004; Hanushek & Woessmann, 2008; Jones & Romer, 2010; Lucas, 2002).

Furthermore, a number of studies demonstrate a positive connection between innovation and productivity growth

Received: 11 December 2022 Revised: 18 April 2023 Accepted: 26 May 2023

DOI: 10.1111/irfi.12422

© 2023 International Review of Finance Ltd.

750 International Review of Finance. 2023;23:750–776.

wileyonlinelibrary.com/journal/irfi

(Che & Zhang, 2018; Doraszelski & Jaumandreu, 2013; Holmstrom, 1989; Romer, 1986). The literature provides

much less evidence, however, directly linking human capital with technological innovation and exploring innovation

as a channel underlying the productivity effects of human capital. Although Ciccone and Papaioannou (2009) show

that better educated countries experience faster shifts toward human capital-intensive industries, and Cinnirella and

Streb (2017) show basic human capital accumulation was associated with both workers' productivity and firms' R&D

processes, understanding of the impacts of human capital on innovation and the consequence for firm value is still

far from satisfactory.

In this study, we attempt to fill this gap by examining how human capital accumulation affects industrial techno-

logical innovation and thus affect industrial growth and firm value. Our main idea is that human capital, especially

labors with higher-level education are particularly important for technological innovation in R&D intensive industries,

because human capital has long been viewed as an important input into R&D and therefore increases productivity

indirectly by accelerating technological innovation (Acemoglu, 2003; Nelson & Phelps, 1966). A consensus is that

new available technologies since the 1970s tended to be more knowledge augmenting than the technologies

invented in the 1950s and 1960s (Autor et al., 1998; Berman et al., 1998; Caselli & Coleman, 2001). As a result,

countries developing new technologies quickly would experience more technological innovations in R&D intensive

industries once we control for other relevant factors. If high-quality human capital facilitates new technology devel-

opment, innovation performance in R&D intensive industries should be better in countries with greater human capi-

tal accumulation.

We test these ideas by exploring whether R&D intensive industries and firms exhibit better innovation perfor-

mance in countries with more human capital and how human capital affects industry performance and firm value.

Using multiple measures of human capital and innovation outputs, we focus on the following four empirical predic-

tions, to our knowledge, have not been investigated previously. First, we expect higher level of human capital to

have a positive impact on innovation in R&D intensive industries. Second, we expect the availability of higher edu-

cated labor force to have the strongest effect on innovation in R&D intensive industries, as more R&D intensive

industries tend to demand more sophisticated knowledge. Third, we expect the effects of human capital on growth

of R&D intensive industries mainly work through enhancing productivity growth rather than facilitating capital accu-

mulation, and work though promoting entrepreneurship (extensive margin) rather than enlarging corporate size

(intensive margin). Forth, we expect firms more R&D intensive have more innovation outputs and firms are better

able to innovate exhibit higher firm value in countries with more human capital accumulation.

To evaluate these predictions, we adopt a generalized difference-in-differences identification framework that

first introduced by Rajan and Zingales (1998) and subsequently has been adopted in the finance and growth litera-

ture (e.g., Beck & Levine, 2002; Brown et al., 2013,2017; Claessens & Laeven, 2003; Eichengreen et al., 2011;

Fisman & Love, 2003; Hsu et al., 2014; Moshirian et al., 2021). This approach also relates to recent works in interna-

tional specialization literature (e.g., Aghion et al., 2015; Ciccone & Papaioannou, 2009; Levchenko, 2007;

Nunn, 2007). In the spirit of Rajan and Zingales, we identify the effects of human capital by testing whether indus-

tries and firms that are more R&D intensive have disproportionately better innovation performance in countries with

more human capital accumulation.

Our empirical analysis is based on data for all the 20 manufacturing industries with two-digit SIC codes in a large

cross section of economies over the period 1976–2006. We collect innovation measures from the widely used NBER

Patent and Citation Database. The independent variable of interest combines a measure of country-level human cap-

ital and an industry-level/firm-level R&D intensity. Our main measure of country-level human capital is the average

years of schooling of the population over 25 from Barro-Lee Education Attainment Database. We also use literacy

rate as proxy for basic education (Cinnirella & Streb, 2017) and employ educational achievement based on interna-

tional tests of math and science (Hanushek & Kimko, 2000; Hanushek & Woessmann, 2012) as proxies of the quality

of human capital. In order to proxy for the R&D intensity across industries, we use R&D expenditure and other finan-

cial data of all publicly traded US based firms from Compustat North America database.

WANG and YU 751