Bangladesh e-Journal of Sociology. Volume 13, Number 1.

January, 2016
68 
 

Investment in Human Capital and

Export Expansion in Indian
Economy
S.A.Saiyed6 and Rajni Pathania7

Abstract: This study empirically investigates the impact of human capital investment on
export expansion in Indian economy over the period of 2000 to 2011. To examine the cause
and effect relationship among selected dependent and independent variable, this study uses
multivariable regression models. These models are estimated with the help of ordinary least
square (OLS) technique. This study uses time series data from the period 2000-01 to 2011-12.
The variables used in this study are primary product export, manufactured product export, total
export, petroleum product export, investment on health and education. Investment on health
and education are used as a proxy of human capital. The result indicates that Investment on
human capital has positive effect on the export expansion of Indian economy.

Keywords: Export Expansion, Ordinary Least Square, Manufactured Product Export,

Total Export, Petroleum Product Export, Investment, Education.

Human capital is one of the principal intangible assets of every developing and developed economy.
To say, countries across the world vary due to the potentials and endowments of the quality of human
resource. Investments on public education and health have positive effects on economic growth and it
provides long term benefits for society. These positive results are in terms of long and healthy life,
access to knowledge, decent standard of living, empowerment of women as well as the neglected
                                                            
6
 Department of Business Economics, The M.S. University of Baroda, India 
7
 Department of Business Economics, The M.S. University of Baroda, India. Email: [email protected]

 
 
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poorer sections of the society etc. Though investments on education contributed indirectly to
economic growth by reducing fertility, improving health and life expectancy, its positive outcome has
major contribution in the path of sustainable growth of the economy. Low human capital is main
obstacle for technology transfer and learning higher skills in developing countries. A higher educated
and skilled workforce will able to adapt more quickly to the sophisticated technology which can bring
rapid production changes and thereby higher exports of the country. It other words, higher capital
stock is positively associated with the export capacity of domestic economy.

Productivity

Exports

Foreign Investment
Human Capital Investment Economic Development

Gross Domestic
Product

Investment on human capital increases the productivity, exports, foreign investment and gross
domestic product. All these are significantly linked with economic development and it stimulate the
future growth of an economy.

According to human development report prepared by UNDP the HDI value of India’s was 0. 344 in
1980, it was increased to 0.547 in 2011 and a rank of 136 among 187 countries (Table 1). India lies
in the medium Human development category.

Table 1: Human development Indicators of India (2011)

Human Development Index Value (HDI) 0.344 (1980), 0.547 (2011)
Literacy Rate (%) 74.04% (male 82.14%, female 65.46%)
Life Expectancy at Birth (in Years) 65.4
Source: Economic Survey

 
 
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Table 2: Trends in social services expenditure by central and state government
(As Percentage to GDP & Total Expenditure)
Expenditure 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Total 26.37 28.41 28.59 27.52 28.07 28.28
expenditure
Expenditure 5.91* 6.76* 6.89* 6.79* 6.89* 7.09*
23.8 24.1 24.7 24.5 25.1
on social 22.4
services
i). Education 2.59* 2.88 * 3.04* 3.13* 3.25* 3.31*
9.8 10.1 10.6 11.4 11.6 11.7

ii). Health 1.27* 1.32* 1.36* 1.29* 1.29* 1.36*

4.8 4.6 4.8 4.7 4.6 4.8

iii). Other 2.05* 2.56* 2.49* 2.37* 2.35* 2.42*

7.8 9.0 8.7 8.6 8.4 8.6

Source: Economic survey 2012-13

* As Percentage to GDP

Above table shows that expenditure on social services as proportion of total expenditure has
increased from 22.4% in 2007-08 to 25.1% in 2012-13. Expenditure on education as a percentage of
GDP has increased from 2.59% in 2007-08 to 3.31% in 2012-13. Health expenditure as percentage of
GDP increased from 1.27% in 2007-08 to 1.36% in 2012-13. Total expenditure on social services as
percentage of GDP increased from 26.37% in 2007-08 to 28.28% in 2012-13. Apart from this
introduction, this paper is divided into four sections. Section two discusses the previous studies
related to relationship between human capital and export growth, source of data and methodology,
while section three analyzes the impact of human capital and export expansion, section four
discusses the conclusion and suggestions.

Review of Literature, Objectives, Hypothesis, Data Sources, Model Specification and Estimate
Technique

Review of Literature
A lot of studies have been done on the different areas of human capital and export expansion at
national and international level. A few studies have been taken for review:
Tuomas (1993) examined the dynamic effects of trade on human capital accumulation in developing
countries. This study found that a favorable change in the terms of trade, the rate of growth may still
rise as compared to the autarky level. Trade has adverse effects on the production structure in the
LDC. Trade changes the production structure toward low-tech goods and lowers the factor price of
human capital. This, in turn, lowers the rate of investment in education which, over time, shows up in
a decreasing level of human capital relative to the rest of the world.

 
 
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Gould and Ruffin (1995) studied the impact of human capital into its role as an input to production and
relationship between growth and the external effects of human capital. This study found that when
literacy rates were relatively high, open economies experience growth rates about 0.65 to 1.72
percentage points higher than closed economies.

Chuang (2000), studied the direction of causality among human capital accumulation, exports and
economic growth in Taiwan during the period 1952 to 1995. This study found that there was positive
relationship between human capital accumulation and exports. There was unidirectional causality
between these two variables and its run from human capital accumulation to exports growth.
 
Brempong, K. (2004), investigated the impact of health human capital on the growth rate of per capita
income in African and OECD countries. This study used solow growth mode, panel data and dynamic
panel estimator. The result revealed that the growth rate of per capita income was strongly and
positively influenced by the investment in health human capital.

Narayan and Smyth (2004), examined the causality among exports, human capital and real income in
china during 1960 to 1999.the result revealed that there was bidirectional causal relation between
human capital and real exports of country.

Farok and Mudambi (2008) examined the performance of human capital and export performance.
This study analyzed how the export performance of 25 nations, in services and manufactures, over a
14 year period, was affected by: Human capital indicators, IT infrastructure, business environment
indicators, and wage levels. Testing the effect of human capital on exports led to a number of key
insights. First, human capital investment has a significant effect on both services and goods exports.
Secondly, contrary to conventional wisdom, human capital investment is not significantly more
important for services exports than for goods exports. The argument about the relative effect of
human capital on services exports and goods exports may be better addressed by examining regional
differences and differences in the level of development.

Afzal et al. (2009), examine both the short-run and long-run dynamic relationships among economic
growth, human development and exports in Pakistan. This study employed annual time series of real
gross domestic product (RGDP), real exports (RX), physical capital (PC) and human development
(HD) in Pakistan for the period 1970-71 to 2008-09. The statistical results and their analysis
supported the 'growth-driven exports hypothesis'.

Tsai and Harriott (2010), analyzed how the various compositions of human capital affect the economic
growth during the periods 1999-2006 in 24 classified as developed and 36 as developing countries.
Human capital measured in terms of percentage of tertiary graduates in agriculture human capital
(AGR); high-tech human capital (TECH); the business and service human capital (SERVICE); the
humanities human capital (HUMAN); and health and welfare human capital (HEALTH). The empirical
results indicated that high-tech human capital was significantly positively correlated with economic

 
 
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growth. This study also found that the tertiary education significantly influence economic growth in
developed and developing countries.

Objective of the Paper:

The main objective of this paper is to investigate relationship between Human capital and export
growth in India. We want to empirically investigate the effect of human capital on exports of primary
products, manufactured products, petroleum products and total exports of Indian economy during the
period 2000-01 to 2011-12.

Hypothesis
We have proposed the following hypothesis for this study:
H0: There is no significant effect of human capital on export growth.

Data Sources
This study employs investigative and empirical methods to analyze the relationship between human
capital and export growth in India in the last 12 years. We use education expenditure and health
expenditure as a proxy of human capital. The data from 2000 -2011 has been collected from
Economic Survey and Handbook of Statistics on the Indian Economy publication of the RBI.

Model Specification
The model for the study is specified as:
LOG (TOX) = α0 + α1EDU+ α2HL + µ1
LOG (PRP) = α0 + α1EDU+ α2HL + µ1
LOG (MANP) = α0 + α1EDU+ α2HL + µ1
LOG (PEPT) = α0 + α1EDU+ α2HL + µ1
TOX : TOTAL EXPORTS
EDU: EDUCATION EXPENDITURE
HL: HEALTH EXPENDITURE
MANP: MANUFACTURED PRODUCT EXPORTS
PEPT: PETROLEUM PRODUCT EXPORTS
PRP: PRIMARY PRODUCT EXPORTS

α and β are the parameters of the intercept and slopes of the coefficients, while µ represents other
variables that could have lent further explanation to explained variables but not included in the model.

Estimation Technique
The modern econometric approach for analyzing the relationship is employed. We adopted ordinary
least square regression (OLS) for analyzing above models.

 
 
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REGRESSION RESULTS
The computation of the model parameter is based on the data shown in the table 3 to 7.
Table: 3 Descriptive Analyses of Data
.
PRP MANP PEPT OTH TOX EDU HL
Mean 89563.77 404536.2 86671.58 26409.50 609083.0 79.18 469.05
Median 80793.00 352761.0 68026.50 12518.00 514098.5 58.07 135.08
Maximum 218404.0 895125.0 265819.0 84633.00 1459281.0 166.97 2110.29
Minimum 19322.19 156858.0 8542.000 5600.00 203571.0 41.86 53.07
Std. Dev. 57975.73 235451.9 81724.40 28439.05 398677.50 44.70 631.31
Source: Researcher’s own calculation

Table 3 presents the descriptive statistics of the data used in the empirical analysis. This table shows
the mean, maximum, minimum and standard deviation of PRP (primary product exports), (MANP)
manufactured product exports, PEPT (petroleum product exports), OTH (other exports) , TOX (total
exports), EDU(education expenditure) and HL(health expenditure). The value of PRP averaged
89563.77 crores between 2000-01 to 2011-12. It varied from a minimum of 19322.19 crores in 2002
to a maximum of 218404.0 in 2011-12. The value of MANP averaged 404536.2 between 2000 to
2011-12 and varied from a minimum of 156858.0 crores in 2000 to a maximum of 895125.0 crores
in 2011-12. The value of PEPT averaged 86671.58 crores between 2000-01 to 2011-12. It varied from
a minimum of 8542 crores in 2000 to a maximum of 265819 crores in 2011-12. The value of OTH
averaged 26409.50 crores between 2000 to 2011-12 and varied from a minimum of 5600.0 crores in
2001 to a maximum of 84633.0 crores in 2010-11. The value of TOX averaged 609083.0 crores
between 2000 to 2011-12. It varied from a minimum of 203571.0 crores in 2000 to a maximum of
1459281.crores in 2011-12.

The value of EDU averaged 79.18167 crores between 2000 to 2011-12 and varied from a minimum of
41.86000 crores in 2000 to a maximum of 166.9700 crores in 2009-10. The value of HL averaged
469.0583 crores between 2000-01 to 2011-12. It varied from a minimum of 53.07000 crores in 2000
to a maximum of 2110.290 crores in 2011-12.
Model : 1
LOG (TOX) = α0 + α1EDU+ α2HL + µ1
Dependent variable: TOTAL EXPORTS
Independent variable: EDUCATION EXPENDITURE(EDU), HEALTH EXPENDITURE(HL)

The regression results are presented in tables 4 to 7 respectively. All selected parameters of this
study are in logarithms form. The result reported in table 2 indicates that education and health
expenditure have positive association with total exports of country. The regression coefficient of

 
 
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Table 4: Regression Result
Dependent Variable: LOG(TOX)
Variable Coefficient Std. Error t-Statistic Prob.
C 9.689738 1.010661 9.587526 0.0000
LOG(EDU) 0.313429 0.414694 0.755809 0.4691
LOG(HL) 0.386752 0.170394 2.269749 0.0494
R-squared 0.842125 F-statistic 24.00353
Adjusted R-squared 0.807041 Prob(F-statistic) 0.000247
Source: Researcher’s own calculation.

education shows that a 10% increase in education expenditure leads to 3.13 % increase in total
exports. On another side 10% increase in health expenditure leads to 3.86 % increase in total
exports, the positive impact of health expenditure is more than education expenditure on total exports.
The t-value of independent variables shows that the observed relationship between dependent and
independent variables is significant at 5% significance level in case of health expenditure and
insignificant in case of education expenditure. The F- test for the model also indicates it is highly
significant, F = 24.00 at sig F= .0002. The R2 value is 0.84 which shows that 84% of the variation in
total exports is explained by the independent variables education and health expenditure.
Model : 2
LOG (PRP) = α0 + α1EDU+ α2HL + µ1
Dependent variable: PRIMARY PRODUCTS EXPORTS
Independent variable: EDUCATION EXPENDITURE (EDU), HEALTH EXPENDITURE (HL)
Table 5 Regression Result
Dependent Variable: LOG(PRP)
Variable Coefficient Std. Error t-Statistic Prob.
C 7.419545 1.492303 4.971875 0.0008
LOG(EDU) 0.486838 0.612321 0.795070 0.4470
LOG(HL) 0.313106 0.251598 1.244469 0.02448
R-squared 0.705831 F-statistic 10.79731
Adjusted R-squared 0.640460 Prob(F-statistic) 0.004062
Source: Researcher’s own calculation.

Table 5 shows the results of relationship among primary product exports and human capital in India.
The regression coefficients of education and health expenditure both shows that there are positive
impacts of these two independent variables (health and education) on primary product exports. The
regression coefficient of education shows that a 10% increase in education expenditure leads to
4.86% increase in primary product exports. The regression coefficient of health expenditure indicates
that a 10% increase in health expenditure leads 3.31% increase in primary product exports. The
results of t-statistics show that only one independent variable is significant at 5% significance level.
The value of coefficient of determination is 0.70, it implies that 70% variation in dependent variable
occur due to independent variables.

 
 
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Model : 3
LOG (MANP) = α0 + α1EDU+ α2HL + µ1
Dependent variable: MANUFACTURED PRODUCTS EXPORTS
Independent variable: EDUCATION EXPENDITURE (EDU), HEALTH EXPENDITURE(HL)
Table 6: Regression Result
Dependent Variable: LOG(MANP)
Variable Coefficient Std. Error t-Statistic Prob.
C 9.766996 0.839109 11.63972 0.0000
LOG(EDU) 0.252527 0.344303 0.733444 0.4820
LOG(HL) 0.352856 0.141471 2.494194 0.0342
R-squared 0.858853 F-statistic 27.38165
Adjusted R-squared 0.827487 Prob(F-statistic) 0.000149
Source: Researcher’s own calculation.

From regression coefficients of independent variables it is clear that there are minimum positive
relationship between manufacturing product exports and human capital. According to the result, a
10% change in education expenditure led to 2.52% increases in manufacturing product exports while
a 10% change in health expenditure led to 3.52% increases in manufacturing product exports. The
positive effect is high and significant in case of health expenditure. The F- test for the model also
indicates it is significant, F = 27.38 at sig F= .000. This result of the t- test for the significance of
individual independent indicates that the t- test for the significance of individual independent variable
indicates that only one independent variable is statistically significant at 5% significance level in the
model. From the above regression result, it is found that coefficient of determination is about 0.85.
This implies that about 85% of the total variation in manufacturing product exports is explained
independent variables. The remaining 15% left unaccounted for by the model is attributed to the error
term.
Model : 4
LOG (PEPT) = α0 + α1EDU+ α2HL + µ1
Dependent variable: PETROLEUM PRODUCTS EXPORTS
Independent variable: EDUCATION EXPENDITURE (EDU), HEALTH EXPENDITURE (HL)
Table 7: Regression Result
Dependent Variable: LOG(PETP)
Variable Coefficient Std. Error t-Statistic Prob.
C 4.670794 2.423956 1.926930 0.0861
LOG(EDU) 0.669512 0.994596 0.673150 0.5178
LOG(HL) 0.607330 0.408671 1.486108 0.1714
R-squared 0.729878 F-statistic 12.15916
Adjusted R-squared 0.669851 Prob(F-statistic) 0.002767
Source: Researcher’s own calculation.

 
 
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The regression coefficient of independent variables are positive. This show that a 10% increases in
health and education expenditure leads to 6.69% and 6.07% respectively, increase in petroleum
product exports in India The F- test for the model also indicates it is significant, F = 12.15 at sig F=
.002. The R2 value is 0.72 which shows that 72% of the variation in petroleum product exports is
explained by the independent variables.

CONCLUSION AND SUGGESTIONS

The purpose of this study was to examine the impact of human capital on the export growth in India
for the period 2000-01 to 2011-12. From the above results and analysis it is found that Exports of all
three selected products has increased with increased in human capital (education and health
expenditure). From regression results it was clear that there was high, positive and significant impact
of health expenditure on total exports and manufactured exports of Indian economy. Education
expenditure has highly positive impact on Primary product exports and petroleum product exports
during the study period. On the basis of above analysis, it is suggested that government should give
more raise the amount of health and education expenditure. It should be range between 7 % to 8 % of
GDP. It will generate more skilled, more efficient and more productive workforce in the economy. By
this they can able to certainly handled productive assets in better way and enhance productivity,
exports and growth of economy.
*

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