Physical and Human Capital Accumulation, R&D and Economic Growth

The fast-growing literature on the new growth theory can be broadly divided into two categories (capital-based and idea-based models) according to the underlying sources of growth, as discussed in Romer [9]. Capital-based models base growth on endogenous accumulation of physical or human capital and correspondingly emphasize investment in physical or human capital (e.g., Lucas [5], Rebelo [6] and Romer [7]). Idea-based models take endogenous technological changes resulting from RD 3] and Segerstrom, Anant, and Dinopoulos [10]). The former focuses on the externalities of capital accumulation leaving aside the intentional R&D activity, which is the focus of the latter, while the latter assumes fixed factor endowments. Both categories capture one important aspect of economic growth and are able to generate sustained growth without relying on any exogenous factor growth. However, physical and human capital accumulation and technological changes driven by innovative R&D are two integrated elements in driving economic growth in a real world economy. On the one hand, physical and human capital are two essential factors in R&D activities and in applying the new technologies resulting from successful R&D to production. On the other hand, the new technologies open up new economic opportunities for investment in physical and human capital to take place. If these two can be integrated into one single framework,1 then we will be able to see the interaction between these two types of forces in pushing economic growth and therefore bring the theory a step closer to the reality. The objective of this paper is to develop a synthesized endogenous growth model, in which