Structural Change Effect On Interregional LPG

The impact of structural change effect on interregional LPG between 1993 and 2010 has been examined by using the dynamic spatial panel data methods.

The functional specification for the empirical analysis is

LPG = f(SC, Human capital, FDI, physical investment) (13)

Where, SC is the structural change that comprises BE and DSE. The LPG equation 13 is expected to be dynamic in nature as it may depend on the previous years’ labor productivity growth, which may suggest as to whether the LPG is diverging or converging across the regions. Further, as explained before, the higher wages that induced by the higher LPG, which determines the reallocation of labor from lower to higher productivity activities. Hence, SC is expected to have an endogenous

The coefficients of all these control variables are statistically significant with a positive sign in all the four models. This result suggests that FDI, human capital and physical investment are the important factor for the variation in LPG across the Indian states during this study period. The findings of this study corroborate with several earlier findings in the context of India (Goldar et al 2003; Kathuria 2013; Siddharthan and Lal 2003) that FDI positively affects inter-regional productivity growth. The inflow of FDI has boosted productivity growth by bringing new advanced technologies and management skills to India. Further, Kathuria (2013) also provide evidence to show that the human capital is a crucial factor for productivity growth in the context of India. Productivity growth has a significant relationship with the quality of human capital, through the technological competence of the workforce. One and the same technology can be applied in two different firms, but the output would vary with respect to the skill or human capital of the labor force employed in these firms. Hence the nature of human capital is also crucial to productivity growth (Apergis et al, 2008; Benhabib et al. 1992; Romer 1990; Schultz 1975; Welch 1970). Further, other studies-with somewhat different focus-have also found FDI, human capital and physical capital

The coefficient of the interaction effect between FDI and investment is positive, which shows that FDI is also contributing to productivity growth indirectly by crowding-in the domestic investment across the Indian states during this study period. The positive coefficient of interaction effect of FDI and human capital indicates that they have positive relationships during the study period. It is noteworthy that Borenzstein et al (1995) provide evidence to establish that the interaction effects of FDI with domestic investment and human capital for the national economic growth are positive in the context of developing countries. Further, other studies with a somewhat different focus have also found an interaction effect between foreign financing and the level of human capital on the economic growth. Cohen (1993) finds a positive interaction between human capital and the overall access to foreign financing of developing countries. The finding of this study may in fact provide a rationale for his finding, at least as far as the FDI component of foreign financing is concerned. Romer (1993) finds a positive effect on economic growth from the interaction between secondary school enrolment and imports of machinery. While imports of machinery and equipment may be one channel for the international transmission of technological advances, FDI has probably an even larger role,