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The 4 IBEA 2016 International Conference on Business, Economics and Accounting

14 – 16 September 2016, Republic of Korea

HUMAN CAPITAL INVESTMENT AND ECONOMIC COMPETITIVENESS

(A STUDY OF INDONESIAN COMPETITIVENESS AMONG ASEAN
COUNTRIES)

Soegeng Wahyoedi
swahyoedi@ukrida.ac.id
Faculty of Economics, Krida Wacana Christian University

Abstract
The objective of this paper is to investigate empirically the effects of investment in human capital on the
competitiveness of the nation. Investment in human capital particularly in terms of education, health,
research and development stimulates the economic growth and competitiveness of a country, and
investment in human capital in the form of research and development (R & D) plays an important role in
human life. The innovations developed through R & D have been believed to be the cause of the rapid
economic growth. Education will also contribute to science and knowledge through R&D which is highly
required for economic growth. Using descriptive cross-section data of investment in human capital
combined by neoclassical economic thought, the paper investigates transmission mechanisms of human
capital investment to economic competitiveness of nations. The results of this research is that the
increasing growth of investment in human capital is positively correlated with the increase in the
competitiveness of a country.

Key words: Human Capital Investment, Competitiveness of the Nations, Education, Research and
Development

Introduction
World Economic Forum has recently published the world competitiveness
report 2015/2016. In the report, 10 countries with high rate of competitiveness have
not experienced a significant change compared to the previous years, wherein
Switzerland is the country with the world’s highest competitiveness in 2015/2016.
Competitiveness is a key for a country to compete in a competition. As the
competition is increasing among countries, industries, as well as companies, the only
keyword to win the competition is by improving the rate of competitiveness.
Dong Sung Cho and Hwy-Chang Moon (2000 and 2013) have proposed a
comprehensive synthesis regarding the competitiveness. They synthesize scholars’
thoughts on competitiveness starting from Adam Smith to Michael Porter. Further,
the summary of arguments on competitiveness reveals that there is a shifting of a
paradigm on competitiveness based on resource superiority which happens to be a
gift i.e. an abundant availability of resources, referring to superiority-based
competitiveness created through superiority in quality of resources, specifically
human capital resources. This can be examined through observation which highlights
that countries holding high rank in global competitiveness in Global Competitiveness
Report own superior human capital resources as well.
Human Capital Report states “A nation’s human capital endowment—the
knowledge and skills embodied in individuals that enable them to create economic
value—can be a more important determinant of its long-term success than virtually
any other resource” (Human Capital Report 2016:8). Consequently, it can be inferred

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that the primary elements of human capital are education, health, and research and
development. These three primary elements will increase the quality of human
resources which in turn will increase a country’s competitiveness.

Research Problems:
1. Apakah Human capital yang dimiliki oleh suatu negara mempengaruhi kemampuan
daya saing suatu negara.
2. Apakah education, health, and research and development berpengaruh terhadap
daya saing suatu negara.
3. Bagaimanakah daya saing Indonesia dalam kawasan ASEAN.
1. Does Human Capital owned by a country affect its competitiveness?
2. Do education, health, and research and development affect a country’s
competitiveness?
3. How is Indonesian competitiveness in the region of ASEAN?

Brief Literature Review

Schwab (2016:4) defines Competitiveness as follows: “we define
competitiveness as the set of institutions, policies, and factors that determine the
level of productivity of an economy, which in turn, sets the level of prosperity that the
country can earn”. In reference to the above definition, it can be inferred that
competitiveness is defined to be a high growth of economics is achieved by
synergizing encouraging factors for productivity.
Meanwhile, Djurica M, Djurica N, and Janivcic R (2014) argue that knowledge,
skills, creativity, innovativeness, ability to learn and other valuable features people
own have become the key element in modern economy, both for their earning
capacity and competitiveness and other economic performances of a company as
well. The terms of 'IT society', 'Learning society', 'Network economy', 'New
economics', 'Knowledge based economy', ‘Knowledge economy', 'Innovative
economy' have been used to describe growing importance of intellectual capital on
competitiveness of a company as well as economic and social development of a
country.
Robert Sollow (1956), followed by Schultz (1961), has stated the importance of
investment in human capital. According to the scholars proposing this theory, the
growth of economy is supported by the growth of research and development, and the
growth of human capital investment.
A superior human capital is the main key to determine the competitiveness.
Sollow (1956) defines that the growth of technology enables an increase of
productivity, and in turn, an increase of economic growth (competitiveness) as well.
The element of technology as a determinant of growth factor has resulted a significant
revolution in a theory of economic growth. Sollow describes his theory in reference to
Sollow’s productive function i.e. Y = K A L in which Y is an output (product and
service), K is a physical capital (machine), and L is labor, is a coefficient, and A is
technology. In an assumption of its constant return to scale, the growth of (K) and (L)
will work in line with the growth of the output. This indicates that if (K) and (L) are
doubled in number, the output will be doubled as well.

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A linear relation between technology and output is then explained by Roomer

(1996), who assembles thoughts proposed by Roomer (1990), Grossman and Helpman
(1991), and Aghion and Howitt (1992) who elaborate the technological factor as the
trigger of economic growth, which later is named as The New Growth Theory. The
transformation from technology to become an output is facilitated by productivity.
Technology creates productivity, and further increases the output.
Productivity is also determined by technology as a part of knowledge
composition which is believed by Tapscott (1997) to be one of the forms of the New
Economy. One of the characteristics of new economy is the reliance towards
knowledge and science. According to Tapscott (1997), people tend to work harder by
using brain instead of muscles. An annual study conducted by World Bank in
1998/1999 has also raised knowledge as its topic of discussion and entitled Knowledge
for Development as the world development annual report in 1998/1999. In reference
to the study proposed by World Bank (1998/1999), it can be inferred that there is a
strong and positive correlation between the growth of knowledge and the growth of
economy of a country.
Phillipe Aghion and Peter Howitt (1992:349) state: “Growth results exclusively
from technological progress, which in turns from competition among research firm
that generate innovation. Each innovation consist of new intermediate goods that can
be used to produced final output more efficiently than before”. Innovations being
developed through research and development are believed to be the cause of fast
economic growth. Industrial countries are recorded to spend high cost of R&D. Aghion
and Howitt (1992) exemplify that there are various ways to accumulate knowledge,
starting from formal education, on the job training, basic scientific research, learning
by doing, innovative processes, and product innovations.
Meanwhile, there are at least two institutions measuring countries’
competitiveness i.e. World Economic Forum and World International World Economic
Forum (WEF) which routinely launch “Global Competitiveness Report” as a means to
highlight the performance of competitiveness of a country. WEF defines national
competitiveness as a national economic capability to achieve high and sustainable
economic growth. The focus is placed on the appropriate policies, suitable institutions,
and other economic characteristics supporting the realization of high and sustainable
economic growth.
WEF classifies the determinant elements of competitiveness into three main
factors i.e. Factor Driven, Efficiency Driven, and Innovation Driven. These three
respective factors are crystalized out of these following twelve foundations:
1. institutions
2. infrastructure
3. macroeconomic environment
4. health and primary education
5. higher education and training
6. good market efficiency
7. labor market efficiency
8. financial market development
9. technological readiness
10. market size

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11. business sophistication

12. innovation

The determinant factors of competitiveness in accordance with WDR can be examined

through this following diagram:

Source: WDR 2015/2016 page 6

Meanwhile, Institute of Management Development (IMD) has published
“World Competitiveness Yearbook”. In a definition proposed by IMD, competitiveness
is a form of capability of a country in creating extra value in increasing national wealth
by managing assets and process, attractiveness and aggresivity, globallity and
proximity, as well as by integrating the respective relations into an economic and
social model.
IMD classifies the determining factors of competitiveness into four categories
i.e.
1. Economic performance
- Domestic economy
- International trade
- International investment
- Employment
- Prices
2. Government efficiency:
- Public Finance
- Fiscal policy
- Institutional framework
- Business legislation

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- Societal framework
3. Business efficiency:
- Productivity and efficiency
- Labour market
- Finance
- Management practices
- Attitudes and values
4. Infrastructure:
- Basic infrastructure
- Technological infrastructure
- Scientific infrastructure
- Health and environment
- Education

Out of the two institutions which measure competitiveness, it can be

examined that human capital factor is the determining factor of competitiveness.
Therefore, the determinant factor of competitiveness can be formulated as in the
diagram below:

Education Health Research and

Development

Human Capital

Technology (A) Capital (K) Labor (L)

Y = K A L 1-

Designed by Wahyoedi 2016

Education, health, and research and development are included as essential factors
which can be called as Human Capital. This human capital will increase the quality of
technology, capital and labor leading to a country’s competitiveness which is also
shown by the increase of national output.

Discussion
The data of this research adopted data cross section which are collected from
134 countries to examine the effect of human capital towards competitiveness.
Human capital can be defined as human capital score obtained from human
development score, from Human Development Report in 2015 published by United
National Development Program. Meanwhile, the data of competitiveness are
measured by score of Global Competitiveness Report in 2015/2016 published by
World Economic Forum.
Furthermore, to examine the effect of education, health, and research and
development on the competitiveness, the data are collected from 114 countries. The

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educational data are obtained from human development index measured by the
average length of study per inhabitant of a country. Health data are measured by
referring to a country’s expenditure on health, obtained from Human Development
Index. Meanwhile, the research and development data are measured by the
expenditure cost of research and development of a country.

The effect of Human Capital on Competitiveness

The hypothesis being tested is that the higher human capital investment
performed by a country, the higher the competitiveness of the country will be.
Ho: Human capital does not affect the competitiveness
Hi: Human capital affects the competitiveness.
Rejected Ho if the value of sig < 0.05

It is expected that an increase of human capital investment of a country will increase

the country’s competitiveness. The calculation result of the correlation between
human capital and competitiveness is presented in Table 1 as follows:

Table 1
Correlation between Human Capital dan Competitiveness
CompScore HDScore
Pearson Correlation CompScore 1,000 ,836
HDScore ,836 1,000
Sig. (1-tailed) CompScore . ,000
HDScore ,000 .
N CompScore 134 134
HDScore 134 134

Correlation between human capital (HDScore) and competitiveness (CompScore) is r =

0.836 which means the correlation shows a strong and positive relationship.

Meanwhile, the effect of human capital towards competitiveness is shown by a

simple linear regression equality.

ComScore = 1 HD Score

The result of regression between human capital and competitiveness produces

regressive equality as it can be seen from Table 2.

Table 2
The Effect of Human Capital on Competitiveness
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) 1,570 ,156 10,046 ,000
HDScore 3,713 ,212 ,836 17,488 ,000

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a. Dependent Variable: CompScore

In reference to the table above, it can be examined that:

CompScore = 1.570 + 3.713 HD Score

Because the value of sig 0.00 < than 0.05, Ho is rejected, which means HD score
significantly affects a country’s competitiveness. This means that if human capital
investment is increasing, then the country’s competitiveness also increases.
Subsequently, the first hypothesis on human capital investment increases a country’s
competitiveness is not rejected. This finding strengthens the arguments proposed by
New Growth Theory which emphasizes on the importance of human capital as the
trigger for economic growth of a country.

The effect of education, health, and research and development on competitiveness

The relationship of education, health, and research and development on
competitiveness can be examined through this following Table 4:

Table 4
Relationship of Education, Health, and Research and Development on
Competitiveness
GCScore Education Health RandD
Pearson GCScore 1,000 ,669 ,557 ,720
Correlation Education ,669 1,000 ,528 ,559
Health ,557 ,528 1,000 ,616
RandD ,720 ,559 ,616 1,000
Sig. (1-tailed) GCScore . ,000 ,000 ,000
Education ,000 . ,000 ,000
Health ,000 ,000 . ,000
RandD ,000 ,000 ,000 .
N GCScore 114 114 114 114
Education 114 114 114 114
Health 114 114 114 114
RandD 114 114 114 114

The relationship between Education and Competitiveness is as much as r = 0.669

indicating an adequately strong and positive relationship. This indicates that the
longer length of education of a labor will increase the country’s competitiveness. The
longer a labor in a country undergoes education, they obtain more knowledge and
skill enabling them to be more productive, which in the end, leading to an increase on
the competitiveness.

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Meanwhile, the relationship between health and competitiveness is shown by

the correlation value of r = 0,557 indicating an adequately strong and positive
relationship. The finding indicates that the healthier a labor is, then he will be able to
perform better, and in the end, it increases the level of competitiveness.
Moreover, the relationship between research and development and
competitiveness is r = 0,720. This value shows a strong and positive relationship. This
indicates that the higher expenditure on research and development signifies capability
in creating new innovations and granting uniqueness, which further will increase the
country’s competitiveness.
The effect of education, health, and expenditure on research and development
can be examined in this following table.
Table 5
The Effect of Education, Health, Research and Development on Competitiveness
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) 3,272 ,138 23,724 ,000
Education ,084 ,017 ,367 5,000 ,000
Health ,020 ,021 ,075 ,966 ,336
RandD ,295 ,050 ,469 5,929 ,000
a. Dependent Variable: GCScore

GCScore = 3.272 + 0.084 Education + 0.020 Health + 0,295 Research and Development

The effect of education on competitiveness is as much as 0.0854, while the

effect of health on competitiveness is as much as 0.020, and the effect of research and
development on competitiveness is 0.295. In reference to Table 5, it can be seen that
research and development is a dominant variable in determining the competitiveness,
followed by education and health. This indicates that government of a country should
pay a serious attention on its expenditure on research and development. The high
amount of expenditure on research and development is able to increase the capability
in creating new innovation and improving knowledge which is believed by New
Growth Theory adherents as an Engine of Growth.

Indonesian Competitiveness among ASEAN Countries

The Association of Southeast Asian Nations (ASEAN) was established on 8
August 1967. The member of ASEAN are Brunei Darusssalam, Cambodia, Indonesia,
Lao PDR, Malaysia, Myanmar, Phillipines, Singapore, Thailand, and Vietnam.
Furthermore, by the end of 2015, ASEAN has entered the era of ASEAN Economic
Community creating:

1. a single market and production base,

2. a highly competitive economic region,
3. a region of equitable economic development,
4. a region fullyintegrated into the global economy

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By 2015, the ASEAN Economic Community (AEC), envisioned as a single

common market and production base, will become a reality. This will lead to the freer
flow of goods, services, investment capital and skilled labour in the region. Tariff and
non-tariff barriers will be reduced, which will have implications for intraregional trade
and investment. New opportunities for growth and prosperity are likely to emerge,
but the challenge is to ensure that growth is inclusive and prosperity is shared.
Ultimately, the success of ASEAN regional integration will depend on how it affects the
labour market and therefore how it improves the quality of life in the region.
Citating the opinion proposed by Aring (2015), the goal of the ASEAN Economic
Community is to improve the material welfare and well-being ofmember countries
through the establishment of ASEAN as a single market and production base.
Realisation of this goal requires the elimination of barriers to the flow of goods,
services, investments and skilled labour within the region, be they at-the-border or
beyond-the-border barriers. At the same time, the region aims at being globally
competitive.
ASEAN is an adequately huge and attractive market. The population of ASEAN
reaches more than 600 million people with income per capita ranging between US$
1,081- US$ 56,319 (WDR 2015/2016), while the trading transaction reaching up to US$
600 billions, making ASEAN as the promising joint market. Nevertheless, AEC creates a
competition among ASEAN countries, with a success indicator to win the competition
is through human capital competitiveness. The country which highlights the
importance of competitiveness is Indonesia. This is due to the amount of Indonesian
inhabitants which reaches up to 251.5 million i.e. almost half of the entire ASEAN
inhabitants. If Indonesia is incapable in increasing its competitiveness, Indonesian
market will be dominated by other ASEAN countries.

The position of Indonesia within ASEAN countries can be seen in Table 6 as

follows
Table 6
Position of Competitiveness and Human Capital in ASEAN Countries
Country Human Capital Rank Competitiveness Rank
Global ASEAN Global ASEAN
Cambodia 97 7 90 8
Indonesia 69 6 37 4
Lao PDR 105 8 83 7
Malaysia 52 3 18 2
Myanmar 112 9 131 9
Philippines 46 2 47 5
Singapore 24 1 2 1
Thailand 57 4 32 3
Vietnam 59 5 56 6
Base on 9 ASEAN countries (Data for Brunei Darussalam are not available)
Source: World Development Report 2015/2016

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Out of 140 countries in World Development Report in 2015/2016/ Singapore is

placed second in the world’s competitiveness, while in ASEAN, Singapore reaches the
first place. Meanwhile, Singapore’s human capital is placed in rank 24 in the world,
and rank 1st in ASEAN. Indonesia, as the country with the highest population, is placed
in rank 37 in the world in terms of global competitiveness, and is ranked 4 th in ASEAN,
while in terms of human capital, Indonesia holds rank 69 in the world, and 5 th in
ASEAN.
The human capital rank for ASEAN countries, Singapore is in the first, followed
by Phillipines and Malaysia. Meanwhile, Indonesia is in the 6th position following
Thailand and Vietnam. This indicates that Indonesia is still far left behind in regards of
human capital investment.
The low rate of human capital is caused by the average productivity of
Indonesian labors which is behind other ASEAN countries. Table 7 shows the position
of average productivity of labors in ASEAN countries.

Table 7
Average Productivity of ASEAN Labors

Source: ACPMS Full Report 2012

Table 7 presents the average labour productivity. As shown in the table, the
labors with the highest productivity is Singapore, followed by Brunei Darussalam,
Malaysia, then Thailand, Philippines, and Indonesia is placed in the 6th rank. In the
table 7, it can be examined that Indonesian labor productivity is far behind other
ASEAN countries.
As the causes of low labor productivity in Indonesia, one of which is caused by
the determiner of human capital i.e. education, health, and research and
development, the position of educational factor in Indonesia measured from the year
of schooling to be completed compared to other ASEAN countries can be seen in the
table 8 below.

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Table 8
The Average Years of Schoolling Completed by Adults and Children

Source: ACPMS Full Report 2012

In reference to Table 8, it can be seen that Indonesia is at the 7th rank out of 10
ASEAN countries. This describes that the educational level of Indonesian human
capital is far behind other ASEAN countries. The educational field which is left behind
becomes one of the factors causing the low productivity of Indonesian labors as it is
shown in Table 7.
Moreover, the low rate of human capital in Indonesia is also referred to the
position of government expenditure on health. Health is one of the factors of human
capital determining a country’s competitiveness. The comparison of government
expenditure in the health sector can be examined in the following diagram.

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Health Expenditure as Percentage of Government Expenditure

Source: ACPMS Full Report 2012

In reference to the above diagram, it can be seen that health expenditure as

percentage of total government expenditure in Indonesia is still far behind other
ASEAN countries, and is only ahead of Myanmar.
Meanwhile, research and development as a dominant variable in determining
competitiveness among ASEAN countries can be seen in the table 9 as follows.

Table 9
Research and Development Expenditure as Percentage of GDP

Source: ACPMS Full Report 2012

In reference to Table 9, it can be seen that Indonesia is left behind compared to other
ASEAN countries. Singapore still holds the leading role in research and development
expenditure as a percentage of GDP.

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Indonesia’s position in the fields of education, health, and research and

development, which is considered to be low, causes Indonesia’s competitiveness in
the area of ASEAN is also low. The low rate of human capital in Indonesia also causes
Indonesia to be flooded by products and services from ASEAN countries because as it
is regulated in AEC, products and services will be traded freely from one country to
another in the region of ASEAN.

Conclusion
Human capital has a positive effect on global competitiveness of a country. The
more a country spend their investment on human capital, the more chances the global
competitiveness of those country is increased. Therefore, the investment on human
capital is necessary in order to increase the competitiveness of a coutnry.
Education, health, and reserach and development have effect on country’s
global competitiveness. It means that a country should pay serious attention on
expenditure on reserach and development because the increase in expenditure of
research and development, which then will create impact in increasing global
competetiveness of a country.
The low rate of Indonesia’s competitiveness is primarily caused by the low rate
of Human Capital owned by Indonesia. Consequently, should Indonesia aim to hold a
dominant role in AEC, the education, health, and research and development should
also gain serious attention from the Indonesian government to be improved.

References:
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ASEAN Secretary.(2012), ASEAN Economic Blue Print.
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Cho, DS and Moon, HC.(2000). From Adam Smith to Michael Porter: Evolution of
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Cho, DS and Moon, HC(2013).From Adam Smith to Michael Porter: Evolution of
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Djurica M, Djurica N, and Janicic R.(2014). Building Competitive Advantage Through
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Vol. 25 Iss 6 pp. 8 - 14

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Global Competitive Report (2015/2016).Retrieved from

http://www3.weforum.org/docs/gcr/2015-
2016/Global_Competitiveness_Report_2015-2016.pdf
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http://www3.weforum.org/docs/WEF_Human_Capital_Report_2015.pdf.
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http://data.worldbank.org/products/wdi.

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