The Role of Human Capital in Manufacturing Plant Growth: Evidence from Taiwan

• Author: Ching‐Fu Chang,Cherng‐Shiun Lin
• Published date: 01 October 2017
• DOI: http://doi.org/10.1111/1468-0106.12227
• Date: 01 October 2017

THE ROLE OF HUMAN CAPITAL IN MANUFACTURING

PLANT GROWTH: EVIDENCE FROM TAIWAN

CHING-FUCHANG*National Taiwan Ocean University

CHERNG-SHIUN LIN National Taiwan University

Abstract. In this study, we set out to investigate the potential relationships between plant growth and

size, age and human capital using a unique employer–employee matched data set for the Taiwanese

manufacturing industry from 1998 to 2005. The general assumption of a reduction in plant growth

with increases in plant size and plant age is confirmed by our manufacturing industry data set, while

plant growth increases with the stock of human capital, albeit at a diminishing rate, thereby implying

a positive concave relationship between plant growth and human capital. Moreover, we find that for

plants with higher levels of human capital, the reduction in plant growth is more moderate with

regard to size than with regard to age, indicating that differences in the stock of human capital within

plants will tend to lead to differences in the patterns of age and size impacts on such plants’growth.

Finally, substantial differences were observed among the influences of the various characteristics on

plants with high, moderate and low growth in size.

1. INTRODUCTION

A number of empirical studies over the past half century have analysed the

determinants of firm growth, with many using the Gibrat (1931) ‘Law of Propor-

tionate Effect’(Gibrat’s Law) or the Jovanovic (1982) ‘theory of selection with

incomplete information’as benchmark propositions for their investigation of

the likely relationships between firm growth, size and age. Some of these studies

have shown that firms’growth rates are either independent of firm size (Hart and

Prais, 1956; Simon and Bonini, 1958; Del Monte and Papagni, 2003;

Haltiwanger et al., 2013) or, indeed, that smaller and newer firms exhibit signif-

icantly higher growth rates than their relatively larger and older counterparts

(Evans, 1987a,b; Dunne et al., 1989; Variyam and Kraybill, 1992; Mata, 1994;

Das, 1995; McPherson, 1996; Liu et al., 1999; Goddard et al., 2002; Reichstein

and Dahl, 2004; Harris and Trainor, 2005).

The general lack of consensus on the interactions between firm growth, size

and age within the extant literature has given rise to research topics aimed at

highlighting the roles of factors other than firm size and age. For instance, Doms

et al. (1995) found that where advanced technology was actively pursued, plants

tended to have higher growth rates and were less likely to fail than other, less

technologically-oriented firms. Hoogstra and van Dijk (2004) and Audretsch

and Dohse (2007) both suggested that firm growth appears to be influenced by

geographical location.

In a recent stream of empirical research, within which emphasis has been

placed on the impact of human capital on firm growth, most studies have tended

*Address for Correspondence: Institute of Applied Economics, National Taiwan Ocean University,

No.2, Beining Rd., Jhongjheng Dist., Keelung city, 202, Taiwan (R. O. C.). E-mail:

cfchang@ntou.edu.tw

Pacific Economic Review, 22: 4 (2017) pp. 554–584

doi: 10.1111/1468-0106.12227

© 2017 John Wiley & Sons Australia, Ltd

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to focus on the human capital possessed by the entrepreneur or the founder.

Such studies have shown that both the managerial and technical competence

of such entrepreneurs or founders, which can be measured by personal charac-

teristics such as age, education and working experience, is likely to influence

firms’start-up size and future growth (Wiklund and Shepherd, 2003; Coad

and Tamvada, 2012).1However, very little is known about the impact of the

human capital of employees on firm performance as measured in terms of

growth. One reason for this may be the lack of appropriate data on the charac-

teristics of both firms and their employees.

Robson and Bennett (2000) use data on small and medium-sized enterprises in

the UK in 1997 to explore whether employees’professional skills were a deter-

mining factor in firm size growth. They used the proportion of employees with

professional skills relative to the total number of employees as the measurement

of human capital of employees and found that there is no significant relationship

between employees’human capital and firm size growth. Persson (2006) exam-

ined the growth of new establishments in Sweden using information on the

establishment of all new firms in each year from 1987 to 1995; what was partic-

ularly interesting about this work was the statistics provided on the employee

distribution of gender, age and education, which allowed a comprehensive

examination of the relationships that exist between human capital and growth.2

According to the results obtained by Persson, firms employing younger (16–24

age group), male and more highly educated workers tended to enjoy much more

rapid growth than their counterparts, thereby empirically confirming the role of

human capital as an important determinant of growth. In addition, Lin (2011)

investigated the influences of employees’educational attainment, gender and

age distributions on plant size growth based on data for the Taiwanese

manufacturing industry from 1998 to 2003. His results show that the presence

of employees with high educational attainment accelerated plant size growth

and that the proportion and age distribution of male employees have

considerable influences on plant size growth.

Apart from empirical studies, an alternative theory of establishment size

dynamics based on the accumulation of industry-specific human capital was

presented by Rossi-Hansberg and Wright (2007), who argue that based on the

resource allocation mechanism within the economy, ‘an abundance of human

capital leads to low rates of return and slower accumulation; conversely, a rela-

tively small stock of human capital leads to high rates of return and faster accu-

mulation’, thereby demonstrating a pattern of mean reversion within the stock

of human capital. Furthermore, they also indicate that ‘as long as establishment

sizes respond monotonically to fluctuations in factor prices, which are driven by

the stock of human capital, mean reversion in these stocks leads to mean rever-

sion in establishment sizes’. Taken together, these arguments suggest that firms

1Refer to Colombo et al. (2004) and Macpherson and Holt (2007) for a more detailed survey of the

related literature.

2‘New establishments’in Sweden are defined as those that were created between 1987 and 1988,

with new establishments in the construction industry being excluded from the sample.

HUMAN CAPITAL IN MANUFACTURING PLANT GROWTH 555

© 2017 John Wiley & Sons Australia, Ltd