Intangible capital and growth in the ‘new economy’: Implications of a multi-sector endogenous growth model

• Analyse structural changes due to the ‘new economy’ and intangible capital.
• New production structure, with a distinct intangible capital production sector.
• Endogenous role of human capital effort devoted to intangible capital accumulation.
• Dynamic properties of the model vary from those of the Uzawa–Lucas model.
• Expansion of intangible capital sector may enhance growth by drawing human capital from other sectors.

The high-technology, knowledge-based ‘new economy’ has contributed greatly to economic growth in recent years. The ‘new economy’ is underpinned by intangible capital and specialised business services. However, despite prevalent empirical evidence, theoretical appreciations of this structural change are sparse. This paper addresses the lacuna by examining the impact of intangible capital on economic growth. It extends the Uzawa–Lucas framework by incorporating a specific production sector for intangible capital and endogenises the human capital effort devoted to intangible capital production. The model provides a novel approach to the analysis of the ‘new economy’ and the impact of business services on growth. The model reveals that expansion of the intangible capital sector may enhance growth by drawing human capital from the other sectors. This possibility is especially relevant for countries where physical capital is relatively scarce. This has significant policy implications for developed as well as emerging economies.