Knowledge spillovers, human capital and productivity

• We argue for the validity of the exclusion restriction based on plausibility.
• We describe the rationale and literature backup of our model clearly.
• We link the theoretical framework to the discussion of empirical specification.

Knowledge spillovers in the form of human capital are often regarded as the engine of sustained growth and development. We employ a rich employer–employee matched dataset on the manufacturing industry in Taiwan, a newly industrialized economy, to quantify the significance of human capital spillovers and their effects on productivity gains. Using the ratio of higher-educated (university or above) employees in each city as the external human capital index of a plant (excluding the reference plant itself) and addressing the potential endogeneity of various unobservable factors attributable to the location of the plant, we find that within a given city, a 1 percent increase in the proportion of higher-educated employees will increase the productivity of plants in that city by approximately 0.93–1.15 percent. Furthermore, the productivity increases are found to be greater for high-tech plants and for those located in cities with science parks. This indicates that human capital spillovers are not only present, but stronger under greater technology intensities. Our measure of the monetary value of such spillover effects indicates that a 1 percent increase in the percentage of higher-educated employees in a city will raise the value-added per plant by US$15,937, or, equivalently, an increase of US$1.27 billion for the entire manufacturing industry.