Human Capital and Industrial Development: Evidence from the Machinery Industry in Bangladesh

While there is consensus that industrial development is imperative in developing countries to reduce poverty and to attain sustainable economic growth, there is no consensus on how to develop industries in developing countries. The emerging literature on cluster-based industrial development, based on successful cases in East Asia, empirically demonstrates that general human capital of a profit seeking entrepreneurs measured by his formal years of schooling, critically determines product upgrading and innovative activities, and, thus, the performance and growth of the industries. The present paper, using primary data, also empirically demonstrates that the application of modern production and marketing techniques is mainly a function of knowledge of an entrepreneurs measured by his years of schooling. Consequently, enterprises manage by relatively highly educated entrepreneurs tend to perform well and grow faster compared to others. Importantly, applying the instrumental variable estimation technique, present paper also demonstrates that the level of education of an entrepreneur is a positive function of the level of education and asset of his father. Based on the findings, present this paper argues that international donor agencies should invest on the accumulation of human capital in developing countries by investing on general education to untie the growth potentials of industries in developing countries.