Human capital investment and innovation: what are the connections?

Finegold and Soskice (1998) argue that Britain is trapped in a ''low-skills'' equilibrium. In Redding (1996), this notion is formalised in a dynamic model which relies on strategic complementaries between firms'' investments in R & D and workers'' investments in human capital. In this paper, we investigate the firms'' side of the story, notably whether their investments in fixed capital and R & D are influenced by the availability of human capital. The latter we capture by using information on the relative wages of the relevant occupational categories or on skilled labour shortages. Our results indicate that a permanent 10 percentage point increase in the number of companies in a firm''s industry reporting skilled labour shortages will lead to a permanent 10 per cent reduction in its fixed capital investment and a temporary 4 per cent reduction in its R & D expenditure.