See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/277714114

IMPACT OF HUMAN CAPITAL INVESTMENT ON THE EXPORTS OF GOODS AND

SERVICES: AN ANALYSIS OF SELECTED OUTSOURCING COUNTRIES

Technical Report · February 2015

DOI: 10.13140/RG.2.1.2583.8245

CITATIONS READS

0 897

1 author:

Zafar Mahmood
School of Social Sciences and Humanities, NUST, Islamabad, Pakistan
86 PUBLICATIONS   384 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Energy Efficiency, Uncertainty and Environment View project

Trade Potential of Pakistan View project

All content following this page was uploaded by Zafar Mahmood on 05 June 2015.

The user has requested enhancement of the downloaded file.

 S3H Working Paper Series

Number 02: 2015

IMPACT OF HUMAN CAPITAL INVESTMENT ON THE
EXPORTS OF GOODS AND SERVICES: AN ANALYSIS
OF SELECTED OUTSOURCING COUNTRIES

Samina Siddique
Zafar Mahmood

February, 2015

School of Social Sciences and Humanities (S3H)

National University of Sciences and Technology (NUST)
Sector H-12, Islamabad, Pakistan
S3H Working Paper Series

Faculty Editorial Committee

Dr. Zafar Mahmood (Head)
Dr. Najma Sadiq
Dr. Sehar Un Nisa Hassan
Dr. Lubaba Sadaf
Dr. Samina Naveed
Ms. Nazia Malik
 S3H Working Paper Series

Number 02: 2015

IMPACT OF HUMAN CAPITAL INVESTMENT ON THE
EXPORTS OF GOODS AND SERVICES: AN ANALYSIS
OF SELECTED OUTSOURCING COUNTRIES
Samina Siddique
Graduate of School of Social Sciences and Humanities, NUST
Zafar Mahmood
Professor of Economics, School of Social Sciences and Humanities, NUST

February, 2015

School of Social Sciences and Humanities (S3H)

National University of Sciences and Technology (NUST)
Sector H-12, Islamabad, Pakistan
CONTENTS

ABSTRACT …………………………………………………………………….. ii
LIST OF ABREVIATIONS ……………………………………………………. iii
1. INTRODUCTION ……………………………………………………………... 1
2. REVIEW OF LITERATURE ………………………………………………….. 3
3. OVERVIEW OF OUTSOURCING IN ASIAN ECONOMIES ……………… 5
3.1. DETERMINANTS OF OUTSOURCING IN ASIAN COUNTRIES ……. 6
3.2. OUTSOURCING SCENERIO IN SELECTED ASIAN COUNTRIES ….. 8
4. MICRO ECONOMIC FRAMEWORK ………………………………………... 12
5. EMPIRICAL MODEL …………………………………………………………. 15
5.1. Explanatory Variables ………………………………………………………. 15
6. RESULTS ANALYSIS …………………………………………………………. 18
6.1. Summary Statistics …………………………………………………………. 18
6.2. Empirical Findings ………………………………………………………….. 19
6.3. Estimation Results for the Asian Countries ………………………………… 21
6.4. Comparison of Human Capital in Asian and Developed Countries …………. 23
7. CONCLUSION AND POLICY RECOMMENDATIONS …………………… 26
7.1. Conclusion …………………………………………………………………. 26
7.2. Policy Implications …………………………………………………………. 27
REFERENCES ………………………………………………………………… 28
APPENDIX ……………………………………………………………………. 30

LIST OF TABLES
6.1. Summary Statistics of Asian Countries ………………………………………… 18
6.2. Summary Statistics of Developed Countries ……………………………………. 19
6.3. UNIT ROOT TEST in Case of Asian Countries ………………………………. 19
6.4. UNIT ROOT TEST in Case of Developed Countries …………………………. 20
6.5. Empirical Findings of Asian Countries in Case of Goods ………………………. 21
6.6. Empirical Findings of Asian Countries in Case of Services …………………….. 22
6.7. Comparison of Human Capital in Asian and Developed Countries …………….. 24

LIST OF FIGURES

3.1. Average Years of Schooling ……………………………………………………... 6

3.2. Total Telephone Lines (Per 100 People) ……………………………………….... 7
3.3. Private Credit Access (% OF GDP) …………………………………………….. 7
3.4. Annual Wages (US Dollars) ……………………………………………………... 8

i
ABSTRACT

It is important to note that with the enlargement of global service economy, it has become crucial
for policymakers, who aim to identify the foreign locations for outsourcing, to understand the
export competitiveness of other nations or alternatively offer their own country as an exporting
location. Human capital investment is considered as a key component in attracting foreign countries
for outsourcing purposes. This study investigates the impact of human capital investment and other
control variables (business environment, wages and IT infrastructure) on export of goods as well as
services from the selected Asian outsourcing countries. Panel Estimated Generalized Least Square
(EGLS) technique is used with country weights to specifically overcome the problem of
autocorrelation. Empirical findings show that investment in human capital is important both for
goods as well as services exports. Human capital investment has a greater impact on exports in
selected Asian countries as compare to selected developed countries. However, contrary to general
perceptions, results suggest that in general human capital is not significantly more important for
export of services than for export of goods. These results have significant implications for policy of
countries who intend to offer themselves as an attractive location for exporting as well as for those
countries who aim to identify such countries where they can start outsourcing activities.

ii
LIST OF ABREVIATIONS
ARCH Autoregressive Conditional Heteroskedasticity
BPO Business Process Outsourcing
FDI Foreign Direct Investment
GARCH Generalized Autoregressive Conditional Heteroskedasticity
GDP Gross Domestic Product
GMM Generalized Method of Movement
ICT Information and Communication Technology
IT Information Technology
KPO Knowledge Process Outsourcing
NASSCOM National Association of Software & Service Companies
OECD Organization for Economic Co-operation and Development
OLS Ordinary Least Square
UAE United Arab Emirates
UK United Kingdom
USA United States of America
WTO World Trade Organization

iii
1. INTRODUCTION
Companies have long struggled with how they can use comparative advantage to enhance their
global market share and profits. Since the 1950s companies started to find new ways for taking the
advantage of the economies-of-scale and broadening of production base to protect their profits.
This made “diversification” a widely held industrialization approach. But later when competition
increased, it became difficult for companies to handle the management structure due to the
diversification strategy. To overcome this problem, many large companies began to consider the
‘outsourcing’ option. While shifting attention to their central process, companies passed non-critical
(non-core) procedures, to be managed by third parties. Until the 1990s, outsourcing was not widely
practiced. But in the late 1990s, as cost saving became part of business strategy for companies, they
began to focus on outsourcing option. They started to outsource such functions which were
necessary to run a business but not related to central business activities.

Economics of outsourcing was pioneered by Coase (1937). He raised the question that “what
establishes boundaries of a firm?” Through internal as well as external cost comparison a firm can
decide whether to produce things internally or externally. By establishing transaction cost
calculation, Coase laid the foundation of the modern transaction cost economics. In the 1990s,
outsourcing became a buzzword and considered as a useful addition to the business world. Since the
firm production chain is broken into various sequence tasks, by focusing on each task firms can
enhance its efficiency. Through outsourcing, significant proportion of management control is
transferred to the suppliers. This involves the risk of diminishing control over supply chain. This
risk can be reduced by establishing the coordination between buyers and sellers.

Due to outsourcing many low skilled jobs in the manufacturing industries are transferred from
developed countries to developing countries. While the services sector in developed countries was
considered less vulnerable to this replacement because it was thought that their better skilled and
educated workers would protect local service industry from foreign competition. This perception
was based on the high investment in human capital in developed countries. But this notion was
challenged by China and other Asian countries in the 1990s when they emerged as most preferred
outsourcing locations (Contractor and Mudambi, 2008).

1
This paradigm shift in production and trade pattern has been made possible by the changes in
business environment including the revolution in information and communication technologies.
Such changes have enabled countries to transmit goods and services exports cheaply and fast.

If the distance becomes less important because of low transmission cost then it is expected that
exports will originate from a large numbers of countries. But the available evidence does not support
this assertion. Exports tend to be concentrated in a few countries. What this suggests is that there
are many other factors other than transmission and transaction costs, which explain the global
export pattern and its intensity. In this context, availability and the quality of the factors of
production, including skilled and educated labor force, the quality of infrastructure and business
environment may all play an important role in affecting the level of exports.

Within the above perspective this paper attempts to answer the following questions: To what degree
the difference in human capital investment across countries affect the goods and services exports?
In this regard, are there any difference between developed and developing countries? How is the
infrastructure and business environment affecting the export of goods and services? Is human
capital investment impact on export of services different from export of goods?

Researchers have diverse opinion concerning the importance of difference between services and
goods. Some of them highlighted the exclusive characteristics of services, inseparability1 and
intangibility, which make them different from goods (Shostack, 1977 and Zeithaml, et al., 1985).
Such differences require a modification in the models of international trade that focus on goods
instead of services (Boddewyn et al., 1986; Contractor et al., 2003; and Erramilli and Rao, 1993).
Nevertheless, some researchers claim that the difference between goods and services is not very
obvious. They argue that services are intangible but some of them require close interaction between
consumer and service provider. However, with increased systematization of corporate knowledge,
digitization and growing absorptive capacity abroad, service functions that were previously
performed in-house are now outsourced abroad. Moreover, there is an interaction between goods
and services and trends including the bundling of services and goods; services becoming “harder”
and more like goods (Contractor and Mudambi, 2008). Such arguments for and against the

1 For certain types of services a close interaction between consumer and producer is required that is they have to be at
the same location for the provision of the services, this give rise to inseparability characteristics.

2
distinctive nature of services are prevailing in literature. This motivates us to run over tests
separately for exports in goods and services.

In the context of outsourcing, this study is examining the impact of human capital investment on
the exports of goods and services for emerging Asia vs. developed countries.

This paper thus attempts to investigate the role of human capital investment in enhancing the
location attractiveness for outsourcing location. In addition, the study also examine the role of
information and communication technology and other factors (business environment, wages) in
determining the attractiveness of a country for outsourcing of goods and services. Good IT
infrastructure has become an essential instrument for countries to compete in the international
market. Similarly, sound business environment is crucial for attracting outsourcing activities. As far
as wages are concerned, foreign countries look at the wage cost in the host country while making the
outsourcing decision.

The output of this study is expected to benefit the countries that are competing with each other to
obtain off shoring contracts and attracting foreign direct investment.

Rest of the paper is divided into six sections. Section 2 presents the review of available literature.
Section 3 gives an overview of outsourcing activities in selected Asian countries. Theoretical
framework is discussed in section 4. Section 5 provides empirical model used in the paper. Results
are discussed in section 6. Finally, section 7 concludes the paper and provides policy implications.

2. LITERATURE REVIEW
Examination of the role of human capital and exports in economic growth had been one of the
oldest and most researched parts of international economics. So far very few studies have been
published on the role of human capital in making countries attractive location for outsourcing.

Hitt et al. (2001) evaluated the impact of human capital on the performance of the professional
service firms. They used data of the selected law firms of the U.S from 1987-1991. Results of this
study indicated that human capital has curvilinear (U shaped) effect which means that initially costs
exceeds the productivity but as human capital is accumulated, costs decreases and productivity

3
increases. On the other hand, leveraging of the human capital has positive impact on firms’
performance because it produces positive return.

Banjeree (2001) analyzed the changes in the export structure of developing countries due to the
development in human and physical capital. Analysis was done for four south Asian countries and
covered time period from 1980-1995. For capturing the development in human and physical capital,
variables like education, infrastructure and capital investment were used. Author argued that as
country became developed, it moves towards production of manufacturing goods. After estimation,
results reflected that human and physical capital has positive impact on manufacturing exports. It
also has some important implications such as for export growth besides other policy measures
development of human and physical capital was necessary.

Contractor and Mudambi (2008) analyzed the impact of human capital investment on the exports of
goods and services in the context of outsourcing. They examined the impact of human capital
investment on the attractiveness of a country as an export outsourcing destination. On the basis of
human capital theory, they analyzed the effect of human capital investment, infrastructure, and the
business environment on the export goods and services from 25 developed and developing
countries from 1989 to 2003. They also investigated that whether human capital is more important
for services exports than goods exports. By using hierarchical OLS method, they found that human
capital investment is important for services as well as goods exports. All the control variables are
also statistically significant and positively related with exports of goods and services. That is, when
foreign countries take the outsourcing decision, they look at the other country’s IT infrastructure,
labor cost and business environment prevail in that country. They also found that human capital
investment is more important and effective for the exports of goods and services in developing
countries as compare to developed countries. The reason for this outcome is diminishing return to
scale as developed countries invest more in human capital exports of goods and services increases
but at a decreasing rate.

Soprana (2011) examined the competitiveness of developing countries in exporting services. The
analysis focuses on several case studies assessed by the existing economic literature, the lessons that
developing countries can draw from those experiences, the role that enterprises, institutions and
governments can play to increase the competitiveness of developing countries and the measures and

4
tools they can use to achieve their objective. The author argued that developing countries can be the
exporters of services if they have high quality of human capital, effective physical infrastructure, and
adequate policies for service export. Efficient institutions are also necessary to solve information
asymmetries. These institutions provide support to enterprises and governments in their hunt to
become competitive service exporters.

3. OVERVIEW OF OUTSOURCING IN SELECTED ASIAN COUNTRIES

The concept of outsourcing was developed in U.S. in the 1970s. At that time, many manufacturing
firms sent their raw material to developing countries due to low labor cost. Initially payroll
outsourcing was done but in the late 1980s outsourcing was moved from payroll to HR function to
manufacturing and eventually to IT outsourcing. Although literacy rate is 99 percent in USA,
conducting sourcing project in USA is very expensive as compared to other outsourcing countries,
e.g., salary of web developer in India is 70 percent less to that of American counterpart. Same is the
case of Canada, which is one of the major outsourcing countries. Its prime area of outsourcing is IT
as country is taking the benefit of better infrastructure and educated labor force. Now a day software
development is growing in Canada. So in order to hire senior software developers, government has
to pay them higher wages. New Zealand is also considered as an important place for outsourcing.
Despite large human capital stock, wages are high in the country so companies consider other
destination for outsourcing. UK is also considered as a hub of IT and BPO outsourcing. Although
UK has a large pool of educated labor force and better IT infrastructure, yet wages are high in UK
just like other developed countries.

Despite the above mentioned developments, until 1989 outsourcing was not considered as a popular
business strategy but in the 1990s as cost saving became a crucial element for companies, so they
started considering the outsourcing option. At that time, companies outsourced those activities that
were not related to their core business activities. Kodak, for instance, was the first American
company which outsourced its IT system in 1989. After this revolutionary step, many companies
decided to outsource their business activities on the basis of cost effectiveness rather than focusing
on whether activity is core or not.

Because of competitive advantage, lower costs, access to technology, access to exports and
availability of the resources for the core business activities, developed countries consider the option

5
of outsourcing to developing countries. Asia is considered as a hub of outsourcing because of its
cheap labor and large pool of educated labor force. Some of major outsourcing countries are
examined below: According to AT Kearney (consulting firm) following Asian countries are
identified as top outsourcing locations; India, China, Malaysia, Thailand, Philippines and Pakistan.

3.1. Determinants of Outsourcing in Asian Countries

At present companies consider the option of outsourcing to improve their current condition. All
over the world it is considered as latest trend in a modern economy. All the major cooperation
considers the option of outsourcing for maintaining their competitiveness because it enhances the
efficiency, accountability and service quality. There are many factors which affect the outsourcing
decision such as wages, IT infrastructure, business environment of a country and most importantly
education and skill level of workers. A good combination of all these factors exists in Asia which
makes it a desirable place for outsourcing.

Educated labor force with lower cost is a major factor that makes Asian countries such as China and
India a preferred place for outsourcing. In order to attract foreign companies for outsourcing, these
countries such as China, India, Pakistan, invest in human capital.

Figure 3.1 shows average years of schooling in selected Asian countries. Overall an upward trend
can be witnessed in this graph.

Figure 3.1: Average Year of Schooling

10
9
Schooling of Countries

8
Sch of China
7
6 Sch of Malaysia
5
Sch of philippines
4
3 Sch of Thailand
2
Sch of Pakistan
1
0 Sch of India
1998 2000 2002 2004 2006 2008 2010 2012 2014
Years

Source: World Bank, 2013.

6
Besides human capital stock, country’s IT infrastructure is a major factor, which foreign companies
take into their consideration when they are searching for outsourcing location. In this context,
Figure 3.2 shows growth in IT infrastructure in Asian countries. Sound and safe business
environment is the top priority of foreign companies while deciding to outsource in foreign
destinations. Country’s business environment is important both for services and goods exports. In
this study we used private credit access as a proxy of business environment (Figure 3.3).

Figure 3.2: Total Telephone Lines (per 100 people)

30

25
Telephone lines

tel China
20
tel Malaysia
15
tel Phlippines
10
tel Thailand
5 tel Pakistan
0 tel India
1998 2000 2002 2004 2006 2008 2010 2012 2014
Years

Source: World Bank, 2013.

Figure 3.3: Private Credit Access (% of GDP)

160
140
Private Credit access

120 pc of China
100 pc of Malaysia
80
60 pc of Philippines
40 pc of Thailand
20
pc of Pakistan
0
1998 2000 2002 2004 2006 2008 2010 2012 2014 pc of India
Years

Source: World Bank, 2013.

7
Private credit access shows the competitiveness of a country. Overall Figure 3.3 shows an upward
trend, which implies that as private credit access increases, competitiveness of that country increases
so outsourcing to that country also increases.

Wages plays an important role when outsourcing and exports are taken into account. Initially lower
wage location countries are attractive for potential outsourcers but this is only a short term
phenomena. But in the long run, for a nation to remain a significant exporter, wage gap is not a
necessary condition. Wage trends are shown in Figure 3.4.

Figure 3.4: Annual Wages (US Dollars)

20
18
16
14 wg china

12 wg malysia

10 wg philippines
8 wg thailand
6 wg india
4 wg pakistan
2
0
1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: ILO, 2014.

3.2. Outsourcing Scenario in Selected Asian Countries

China:
Since China is the most populated country, its population would offer competitive advantage against
the other major players in outsourcing industry. Many other countries have established their head
offices in order to establish businesses. China’s five major cities provide a huge amount of souring
services; Shanghai, Beijing and Chengdu are providing services such as testing and research, product
development and business analytics. Shenzhen is known for software application, maintenance and
development and Guangzhou specializes in engineering services.

8
Finance, services, manufacturing and health care are included in China’s primary specialization.
China has advantages over other Asian countries in case of manufacturing because of its experience
in manufacturing and its knowledge of delivering the products that adhere to the demanding
standards that are required by both western legislation and consumers. The other reason may be that
China has cheap labor as compared to India, where wage inflation makes it difficult for it to
compete on the basis of prices. In order to get business from western companies, government has
given priority to English language in schools and universities. Its literacy rate is 93.3 percent. In
China’s economic history opening up its economy to the world is the turning point which caused
changes in the business world and as well as in the outsourcing industry.

India:
In 1994, the Indian government announced a policy in which it liberalized its telecom sector. In
1999 further changes were made in this policy, such as ending of state monopoly on global calling
facilities. First outsourced service was the medical transcription and BPO outsourcing was started at
the end of the 1990’s. Now India is the one of the leading outsourcing locations. Largest customers
of Indian outsourcing industry are America and Europe, which account for 60 and 31 percent of IT
and BPO exports respectively. BPO and IT services outsourcing first started in 1980s and this
industry grew rapidly in 1990. According to NASSCOM2 (2014) BPO and IT exports employed
about 2.2 million people in 2009. BPO is the fastest growing fragment of Information Technology
Enabled Services industry in India. The reasons for this growth are low cost, economies of scale,
risk mitigation etc. For BPO, India is considered as the most preferred place and the reasons for this
boom in BPO industry are cheap labor and large pool of English speaking and skilled professionals.

Philippines:
Although India is the main candidate in the BPO industry, but now it has a rival. Philippines is
considered as a leading nation in the BPO industry, both in call service and non-voice sector. On the
other hand, in IT service market (web designing, maintenance, etc.), it is an emerging player.
Outsourcing begun in 1990s, but it witnessed growth during this decade. Initially the attention was
paid to the low value added BPO services and on call centers, but later it was shifted towards web

2 National Association of Software and Services Companies is a trade association of information technology business
process outsourcing industry.

9
designing, animation legal services and other shared services. Manila was considered as a best place
for outsourcing earlier, but now other cities such as Pasig city Cebu city also considered for
outsourcing purpose. For BPO services, Philippines is the destination of choice, mainly voice based
outsourcing services. According to BPAP (Business Processing Association of the Philippines) IT-
BPO industry produced revenue of $13 billion in 2012, whereas it was $11 billion in 2011. The
reason is that Philippines remain in the colony of the USA; its culture is similar to that of the USA.
Adult literacy rate is 93% in Philippines and almost 55% of total population speaks English. So this
literate and English spoken population is the major fascination for outsourcing companies.

Malaysia:
Government support, industry expertise, and oil and gas logistics were the factors which help in the
development of the outsourcing industry of Malaysia. As Malaysia is multi sectorial and multilingual
country, many companies get attracted to doing outsourcing. Major developments have taken place
in the industry, including the inclusion of five Malaysian outsourcing companies in the Global
Services 100 list, a capability-driven assessment of IT/ IT enabled service providers globally.
Because of good infrastructure and multilingual skills of the workers, Information Technology
Outsourcing (ITO) is growing in Malaysia. Malaysia is benefited due to its educated labor force,
strategic location and global integration. Malaysia gives high priority to education and formal
training. According to UNESCO Annual Report (2009) literacy rate is 91% in Malaysia. Educated
labor force of Malaysia is major attraction for outsourcers. For transforming Malaysia into high
income, knowledge based economy by 2020; main focus is on the Shared Services and Outsourcing
(SSO) industry. The activities that come under the SSO category are BPO, ITO and KPO. Many
factors such as government incentives, good infrastructure, skilled labor force, ICT resources, sound
business environment ensure companies receive support and help in thriving in this sector.

Thailand:
Although Thailand is known for tourism and its automobile industry, but now it becomes a
dominant player in IT industry. The country has the potential in three major outsourcing activities
such as BPO; Voice and ITO. But current outsourcing activities are concentrated in ITO. Thailand
launched its first information technology policy in 1996 named as IT 2000. The purpose of this
policy was building good infrastructure, good governance, increase the literate workers and build a
knowledge based economy in five key areas; e-Commerce, e-Industry, e-Education, e-Society and e-

10
Industry. Although Thailand is doing well in outsourcing industry, but it does not reach to the full
potential level. There are certain challenges which economy is facing now such as provision of good
infrastructure, especially ICT, augment the use of the English language which helps in attracting
foreign companies, political instability, etc. According to UNESCO Annual Report (2009) graduates
from universities are 506000 but English spoken are only 10% which is relatively low as compare to
Philippines. Consequently government is now trying to improve its quality of education in order to
attract foreign investors. For becoming the major outsourcing destination, Thai government is
taking some steps such as improving infrastructure and level of education in the country, making
long term plans and improving business environment etc.

Pakistan:
Pakistan is working to become a dominant player in outsourcing industry by focusing on important
element, such as intellectual property rights management, area expertise, etc. Due to its geographical
location, expanding transportation and communication network and improving business
environment, it is an attractive destination for many investors. Recently, many IT companies have
invested billions of dollars here such as Etisalat UAE telecom Provider Company, Google, Citi
bank, bank of America, etc. Microsoft, Cisco and IBM also expand their operations in the country.
In order to attract foreign investment, Pakistan is also investing in human capital, e.g. education and
strengthens its IT industry. UNESCO Annual Report (2009) stated that currently only 2.6 % of
GDP is allocated to education sector which is far low from countries such as US (8% of GDP is
allocated to education sector). The Pakistan Software Export Board has created IT parks. IT
workforce with good command on English language is a real attraction for foreign companies.
Besides this good telecommunication infrastructure, tightening environment for intellectual property
rights tax exemptions the other factors which help in attracting foreign investor.

Asian economies have become the hub of outsourcing because of their cheap labor, raw material
and large size market. As compared to American/European workers, living standard of Asian
workers is low so companies pay less amount of money to them than American or European
workers so it is cost effective for the outsourcing companies. Apart from cost saving, foreign
companies get access to experts and professionals through outsourcing. On the other hand,
outsourcing generates many job opportunities in developing countries. So today outsourcing
becomes a choice rather than an option.

11
4. THEORETICAL FRAMEWORK

In this section, for analyzing the relationship between human capital and exports, generalize version
of Dixit and Woodland (1982) model is used. Human capital is used as a new explanatory variable in
the model. Basically this model established the link between factor endowment and international
trade. There are certain assumptions of Dixit and Woodland’s model such as; 1) all countries use
same technology in production and there is constant return to scale, 2) collective preferences are
homothetic and alike,3) there exist n inputs and m products, and 4) there is a set of production
possibilities in productive sector which can be symbolized by Y(v),where v is the vector of inputs
v=(v1, …, vn) and Y(v) is the set of all possible production vectors.
Now domestic product is maximized by production sector and can be written as:
( ) { ( )} … (1)

where, G (p, v) is production function and G (p, v) ≥0 ... (2)

p= (p1,…,pn) is a price vector of m products for small open and price taking economy. The function
G (p, v) is homogenous, continuous and concave in v for fixed p. Now differentiate G with respect to
vi such as (wi (p, v) =∂G (p, v)/∂vi).

Now on demand side which can be explained as expenditure side there is:

( ) { ( ) } … (3)

E (p, u) is representing the demand and Eu≥0.U is direct utility and c shows the aggregate
consumption with c=Σmi=1 ci. The expenditure function is homogenous, continuous and concave in p
for fixed u.

By assuming that all income will be spent, indirect utility will be obtained by solving following
equation:-
( ) ( ) ( ) … (4)

where, S =indirect utility

12
Solution of equation (4) generates the maximum possible utility for a given country with an
endowment of factor v, considering a price level p (what comes from an optimal production system
and pattern of trade). Thus, maximum Utility can be stated as:-

( ) … (5)

Exports are production surplus after domestic production (x=y-c).They can be explained by price (p)
and factor of production vector (v). From equation (4) and (5), indirect utility function can be
obtained:

( ) [ ( ) … (6)

Take two nations where factor endowment varies to some extent. Country A has factor endowment
equal to v, and another country has factor endowment equal to v*=k.v, k is a positive scalar.
According to Hecksher-Ohlin-Samuelson (HOS) theorem, this difference allows the endowment
impact on trade to be a relative function, relative to the amount of factors used in the production of
goods. Variation in country A’s exports can be captured as:

dxs=xvdv … (7)
Above equation states that link between factor endowment and trade of goods is determined by
dependence of in relation to dv. Oversupply (exports) of any good j will show the intensive use
of factor i when ∂xj/∂vi is positive. This shows the Rybczynski theorem effect, which was dedicated
towards the production side.

In this study general model is used for examining the factors that affect the country’s trade flows.
Model used physical capital (K), labor force (L) and human capital (H) which is measured through
education level. Human capital is used in addition to the factors that were used by Dixit and
Woodland in their model. Now suppose v= (K, H, L) and level of production can be maximized so
equation (7) can be written as:

( ) … (8)
where,
xv=∂x/∂vi*vi/x … (9)

13
According to equation (8) due to changes in factor endowment, value of exports changes. It can be
written in linear equation form as:
dX = xkdK + xhdH+xldL … (10)
Equation (10) can be rewritten to show the country’s flow of exports as:

… (11)

where,

Xit= vector of exports from a certain country during time period t,

K = physical capital,
L = labor force,
H = human capital measured through education level of workers, and
α, β,ϕ, φ are parameters, μi is fixed unobservable affect and ηit are dynamic shocks.
Regression model can be written in general form:

Xit=Σkj=1 βZjit+uit … (12)

where,
Z3it=set of all explanatory variables
Xit=export vector

This equation states that export of country depend upon set of explanatory variables (physical
capital, labor force and human capital) and some other factors which cannot easily observable. Some
dynamic shocks also affect exports. Even though human capital plays an vital role in enhancing the
country’s attractiveness as outsourcing location and boosting exports of goods and services, there
are some other factors that can play an important role. Country’s IT infrastructure such as telephone
lines, Internet users, Business environment prevail in that country, Ease of access to credit, wages
are important factors that can influence country’s desirability as outsourcing location and export of
goods and services.

3 Zit shows the set of all explanatory and control variables. It can also be witnessed in the studies of Fraqa and Bacha
(2012), Fafchamps (2008) and Tandrayen (2004).

14
5. THE EMPIRICAL MODEL
In determining the impact of human capital on exports of goods and services, it is necessary to
quantify the human capital. Human capital can be measured through health and education
indicators. In this study average year of schooling is used for measuring this indicator.

5.1. Explanatory Variables

Human Capital Investment: Human capital value is examined on individual or at firm level but
very rarely at global level. At individual level it was examined that whether the high value of human
capital ensures quality life of workers. But at the firm level, the link between firm’s performance and
human capital is strong and complex as firms invest in human capital but they also want to keep
labor cost low (Hit et al.,2001). According to human capital theory, there exist positive relationship
between human capital and economic growth. Many studies such as Becker (1975), Schultz (1961),
Maddison (1987), and Chuang (2000) found positive link between exports and growth. Levin and
Raut (1997) tested whether there is a direct link between human capital and GDP. They argued that
human capital is utilizes by export sector in best possible way as compare to other sectors in the
economy. They found that GDP is greatly affected by human capital and export. But still it is not
clear whether human capital is more imperative for manufactured goods outsourcing or services
goods outsourcing. Hebert and Delios (2004) argued that as compare to financial services, Retail
trade and manufacturing required lower level of human capital investment. One conjecture is that
commercial services have need of not only high level of human capital stock but also need a huge
emphasize on customer relations and the quality of this collaboration. Skaggs (2004) also showed
that as compare to manufactured goods, more educated labor force is obligatory for commercial
services.

According to economic theory, human capital investment role is affected by the differences in the
countries level of development. Narula (1996) showed that investment in human capital is more
essential for the growth of the developing nations. Wolf (2000) called it a “catch up” phenomena as
lagging countries show speedy growth in educational attainment and exports. Some economists
argued that transfer of knowledge and technology from developed to developing countries through
trade is only beneficial for skilled and educated workers. Without skills and education, workers
cannot utilize the technology and knowledge properly. While other such as Arora (2004) argued that
rich nations continues investment in education enhances the workers’ productivity and this will

15
nullify the wage gap between developed and developing countries. Workers in developed countries
get more wages as compare to developing nation’s workers-but developed countries workers are
considered more productive. Another view is that the productivity gap between developed and
developing countries is because of industry cluster advantages and higher level of automation Porter
(2000). So there is no consensus among the economists on this issue. It is still an untested area that
whether human capital investment is more important for developing countries than developed
countries in case of export of goods and services. This study tried to answer this question.

Different variables are used as a proxy of human capital such as education and health indicators
Earlier studies such as (Barro, 1991 and Menkiw et al.,1992) used secondary and primary schooling
as a proxy of human capital, but these proxies were not reasonable for representing relevant human
capital stock of labor force or do not take into account the educational level changes during
educational and demographic transition (Hanushek and Kimko, 2000).To overcome such concerns
(Barro and Lee,1993) developed internationally comparable dataset on average years of schooling
through individual country’s surveys and census. This study used the educational attainment data set
for the period of 2000-2012.

Control Variables
In addition to human capital investment, other country specific control variables are also introduced
in the analysis such as IT infrastructure, prevailing wage rate in a country and business environment
of a country.

IT infrastructure: ICT is used for measuring country’s IT infrastructure. As data on ICT is not
available so total telephone lines users are used as a proxy: Export of goods and services are highly
dependent on better system of movement of inputs, energy and communication network. It
generally argued that IT infrastructure has more significant impact on services exports as compare to
manufactured goods exports. Information and communication technology (ICT) is very important
to support trade and market creation for a nation. François and Manchin (2006) studied the impact
of infrastructure on trade cost and flows. They concluded that in developing countries,
infrastructure is the main determinant of trade cost. These countries are not able to produce and
compete in international export market because of the lack of infrastructure. Baghwati (1984)
showed that with the technological changes services become tradable. These services are called

16
“modern impersonal progressive services” (Baumol, 1985), these include banking, insurance and
business related services.

Wages: Wages plays an important role when outsourcing and exports are taken into account.
Initially lower wage location countries are attractive for potential outsourcers but this is only a short
term phenomena. But in the long run, wage gap is not a necessary condition. Farrell, Kaka, and
Sturze (2005) showed that incursion of service off shoring in has accelerated wages in Indian cities
dramatically. Secondly across countries, higher productivity is generally associated with higher wages
(Arora, 2004) and on the other hand lower wages reflect low workers’ productivity (Mincer, 1998
and Jones, 2001).

Private credit: Private credit is used as a proxy of business environment prevails in a country.
Country’s business environment is important both for services and goods exports. In order to attract
foreign companies for outsourcing purposes, sound business environment is one of the crucial
requirements. When a foreigner company looks for an outsourcing location, it gives priority to such
location where safe and sound business environment is prevailed which in turn boosts the exports
of host countries. Duval and Utoktham (2009), Ghani (2012), and Ghani and Clemes (2013)
evaluated the impact of business environment on trade of goods and services and they found
significant impact.

All above variables can be represented through the model:

Xgoods =β0+β1sch+β2tel+β3 wg+β4pc+ε … (13)

Xservices= β0+β1sch+β2tel+β3 wg+β4pc+εt … (14)

The data used in this study are from 2000-2012. Data on Commercial services exports and
Manufacturing exports are taken from the World Development Indicators (World Bank). Different
proxies are used in the literature for measuring human capital. In this study, public spending on
education and average years of schooling are alternatively used in the estimation. These data are
obtained from the World Development Indicators (World Bank) and the data set prepared by Barro
and Lee. In order to measure IT infrastructure total telephone lines (per100 people) were used.
These data are taken from the World Development Indicators (World Bank). Following Anagaw, et
al. (2001), private credit as a percentage of the GDP is used as a proxy for business environment.

17
These data are obtained from the World Development Indicators (World Bank).Since the data on
urban area wages are not available, therefore, real annual wage(per hour) is used. These data are
obtained from International Labor Organization (ILO).

6. RESULTS AND DISCUSSION

This section includes the discussion of summary statistics of the data used and the empirical findings
of the study.

6.1. Summary Statistics

Summary statistics were calculated for selected developed and Asian countries. Mean exhibits the
average of the data set. Mean value of every variable is high in developed countries as compare to
Asian countries (Tables 6.1 and 6.2). Mean value of public spending on education and average years
of schooling are high in developed countries, which implies schooling is high there.

Table 6.1: Summery Statistics: Emerging Asian Countries

Variable Mean STD Median Observations
Log(manufacturing 10.96120 0.569521 11.00791 78
exports)
Log(commercial 10.25004 0.597592 10.27940 78
services exports)
Public spending on 3.483740 1.480350 3.110735 78
education
Average years of 6.526923 1.945429 6.600000 78
schooling
Telephone lines 9.905128 7.565572 6.739323 78
(per 100 people)
Wages 5.213205 6.084747 2.715000 78
Private credit (% of 73.50426 43.05028 73.11226 78
GDP)

18
 Table 6.2: Summery Statistics: Developed Countries
Variable Mean STD Median Observations
Log(manufacturing 11.09102 0.805508 11.33975 52
exports)
Log(commercial 10.89248 0.666801 10.99711 52
services exports)
Public Spending on 5.584280 0.650331 5.387955 52
Education
Average years of 11.42885 2.025363 12.30000 52
schooling
Telephone lines 53.64913 7.966876 54.49700 52
(per 100 people)
Wages 18.56338 3.538613 17.90000 52
Private credit (% of 158.2678 30.45133 161.3872 52
GDP)

6.2. Empirical Findings

6.2.1. Unit Root Test
We evaluated the time series data in terms of their being stationary or non-stationary so that we can
approach a valid and reliable understanding about estimation of the model. We use Levin, Lin and
Chu test to check the stationarity of the variables in Asian and developed countries. The null and
alternative hypothesis for conducting unit root test is as follow:

H0: Variables exhibit Unit Root

H1: All the Variables are stationary

Table 6.3: Unit Root Test in Case of Asian Countries

Variable Level Order of Integration
Coefficient Probability
Commercial services -2.22116 0.0132 I(0)
exports
Manufacturing -3.02796 0.0012 I(0)
exports
Public Spending -1.87000 0.0307 I(0)
Schooling -4.4498 0.0000 I(0)
Private Credit Access -4.10582 0.0000 I(1)
(% of GDP)
Wages -3.27451 0.0005 I(0)
Telephone lines -4.61452 0.0034 I(0)

19
 Table 6.4: Unit Root Test in Case of Developed Countries
Variable Level Order of Integration
Coefficient Probability
Commercial -2.79037 0.0026 I(0)
services exports
Manufacturing -2.01224 0.0221 I(0)
exports
Schooling -3.43782 0.0003 I(0)
Public Spending -1.81502 0.0348 I(0)

Private Credit -2.21666 0.0133 I(1)

access (% of
GDP)
Wages -6.30053 0.0000 I(1)

Tables 6.3 and 6.4 indicate that all variables are stationary at levels except private credit in case of
Asian countries, and wages and private credit in case of developed countries.

6.2.2. Generalized least square

We estimate the empirical equation by means of the Common Constant method. We tried various
alternatives depending on variable combination, econometric methods and data sources. But Panel
Estimated Generalized Least Square (EGLS) is applied to estimate equation with country weights
and correction of standard errors for problem of autocorrelation and heteroscedasticity.

We also tried both fixed and random effects models but results were not consistent as our data set is
small. Fixed effects model generates dummies equal to cross sections in the study. Here order of
cointegration is not same so we take the difference of the variables. In this way we lose observation
and degree of freedom problem occur. Since number of observations was less in this study so we
cannot use random effect method. Pooled least square is the best method to apply if t-statistics,
standard errors and probability are quite good to explain results according to theory. And it should
also satisfy BLUE (best linear unbiased estimates) properties. If it does not fully satisfy these
properties then GLS (cross section) is used to tackle that problem. We also apply SUR (PCSE) to get
rid of problem of autocorrelation. The common constant method works under the principal
assumption that “there are no differences among the data sets of cross-sectional data sets. This

20
method, also known as “pooled OLS” method, assumes the common constant α for all the cross
sections in the model. GLS is used for finding out unknown parameters in linear regression model.

6.3. Estimation results for the Asian countries

It is established in the literature that human capital investment is more important for commercial
services exports than manufactured goods exports. But overall results do not give any indication that
human capital investment is more important for services than goods exports. Human capital is
proxied by average years of schooling and alternatively by public spending on education. This
variable is strongly significant for Asian countries in case of exports of goods as well as services
when average year of schooling is used as a proxy (also see Appendixes A1 and A2 for empirical
results of public spending in case of developing and developed countries).

Coefficients of schooling in case of manufacturing and commercial services exports shows that 1
year increase in schooling, increases the exports of manufacturing by 0.62%4 and exports of
commercial services by 0.33%. These results corroborate with the findings of Bah and Loo (2012) in
the case of East Asian countries. Results are also consistent with the studies of Raut and Levin
(1997) Olney (2013), Banjeree (2001), Chaung (2004), Black and Lynch (1996) and Fafachama
(2008).

Table: 6.5: Estimated Generalized Least Square: Manufacturing Exports

Dependent variable: LOG(Manufacturing Exports)

Method: Panel EGLS (Cross-section SUR)
Sample:2000-2012 Periods Included:13 Cross-sections:6
Total panel (balanced) observations: 72
Variable Co-efficient Std. Error t-statistic Prob.5
C 9.928528 0.041334 240.2031 0.0000***
Sch 0.095508 0.006373 14.98695 0.0000***
Tp 0.061071 0.002822 21.63940 0.0000***
Wg 0.000931 4.54E-05 20.50742 0.0000***
D(Pc) 0.011375 0.002793 4.072097 0.0001***
R-squared 0.958692 F-statistics 388.7447 0.000000***

4 Conversion to elasticity is made by using the formula given in Gujrati (2004). All further percentage conversions are
based on this formula.
5 *** show statistical significance at 1% level.

21
Table 6.6: Estimated Generalized Least Square: Commercial Services Exports
Dependent variable: LOG(Commercial Services Exports)
Method: Panel EGLS (Cross-section SUR)
Sample:2000-2012 Periods Included:13 Cross-sections:6
Total (balanced) observations: 72
Variable Co-efficient Std. Error t-statistic Prob.6
C 10.12363 0.069645 145.3604 0.0000***
Sch 0.051037 0.003376 15.11596 0.0000***
Tp 0.050882 0.003855 13.19814 0.0000***
Wg 0.000173 6.58E-05 2.624447 0.0107**
D(pc) 0.017533 0.002707 6.476923 0.0000***
R-squared 0.892645 F-statistics 139.2737 0.000000***

Control Variables
For measuring ICT in these countries total telephone lines (per 100 people) are used as a proxy. The
results of telephone users reported in Tables 6.5 and 6.6 show that 1 percent increases in ICT
increases the exports of goods by 0.6% and export of services by 0.5%. These results are consistent
with the study of Ghalandri (2013), Asma et al. (2011), Mbekeani (2007) and Ijaiya and Akanbi
(2009).

For measuring country business environment we used private credit access as a proxy. This variable
is significant both for exports of goods and services. The results reported in the Tables 6.5 and 6.6
show that 1 percent increase in private access, increases exports by 0.8% in case of goods and 1.2%
in case of services. Study of Anagaw and Demissie (2001) also showed significance of private credit
access. Studies of Aubion and Engemann (2012),Ghani and Clemes (2013) and Duval and Utoktham
(2009) also confirmed these findings.

Empirical findings further show that a 1 percent increase in wages increases exports goods by 0.20%
and export of services by 0.03% (Tables 6.5 and 6.6). In order to cope with intense international
competition, exporting firms need skilled workers so for hiring such workers firms have to pay high
wages to them (Munch and Skaksen, 2008). Muller and Nordman (2006), Riker (2010) also
confirmed these findings. Initially lower wage location countries are attractive for potential

6 ** and *** show statistical significance at 5% and 1% levels, respectively.

22
outsourcers but this is only a short term phenomena. But in the long run, for a nation to remain a
significant exporter, wage gap is not a necessary condition. Farrell et al., (2005) showed that due to
off shoring wages has accelerated in India’s major cities. Secondly, across countries higher
productivity is generally associated with higher wages (Arora, 2004), while lower wages reflect low
workers’ productivity (Mincer, 1998 and Jones, 2001).

6.4. Comparison of Human Capital in Asian and Developed Countries

Some scholars argued that human capital investment produce desirable results in emerging countries
because these countries use education for catching up the developed countries (Narula, 2004). They
improve their educational attainment level, which increases their productivity and in turn boost up
their exports. While others such as Arora (2004) argued that rich nations continue with investment
in education, which enhances the workers’ productivity and this will invalidate the wage gap between
developed and developing nations. So there is no consensus among the experts on this issue. It is
still an untested area that whether human capital investment is more important to export of goods
and services for developing countries than developed countries.

Table 6.7 provides the comparison of the effects of human capital for exports from developed and
Asian nations. Results show that human capital investment has a strong significant impact in case of
emerging Asia. But in case of developed countries it does not give a significant outcome. The reason
is that increased human capital stock is positively related with exports to some certain level after that
it exhibit “diminishing return” effect as developed countries keep on increasing human capital
investment. That is, human capital increases exports but at a diminishing rate.

While comparing the Asian and developed countries, we can notice that human capital measure is
significant and positive in all selected Asian nations for both services and goods. On the other hand,
it is positive and significant in case of manufacturing exports but insignificant for the exports of
services in developed countries. It is an ex post hypothesis which means that increasing human capital
is positively related to the exports of goods and services but up to a certain limit. Beyond that point
human capital measure is plateau out. Since in developed countries average years of schooling are
high; therefore, the impact of this variable on exports reached to the point of diminishing marginal
return. Results show that a one year increase in schooling increases the exports of goods by 0.4%,
while exports of services increase by 0.1%. Studies by Olayemi (2012), Raubold (2006), Aigboka,

23
 Table 6.7: Comparison of Human Capital between Asian and Developed Countries

Emerging Asia Developed Countries

Goods Services Goods Services

Variable Coefficient t-value p-value Coefficient t-value p-value Variable Coefficient t-value p-value Coefficient t-value p-value

Sch 0.095508 14.99 0.0000 0.0510 15.16 0.0000 Sch 0.0350 3.53 0.0009 0.0104 1.03 0.3070

TP 0.06107 21.64 0.0000 0.0508 13.20 0.0000 Tp 0.0523 11.01 0.0000 0.0269 6.57 0.0000

D(Pc) 0.01137 4.07 0.0001 0.01753 6.48 0.0000 D(Pc) 0.0089 5.83 0.0000 0.0078 4.49 0.0000

Wg 0.000931 20.51 0.0000 0.00017 2.62 0.0107 D(Wg) 0.0814 6.25 0.0000 0.0743 5.00 0.0000

24
Imahe, Aileme, (2007), Wolf (2000) confirm these findings. To further confirm this notion that
human capital investment is important for developing countries, pooled regression with regional
dummy is estimated. Results of this exercise are reported in the Appendix A1, which does confirm
this notion.

Control variables
ICT is positively associated with both the export of goods as well as services in both regions. In
developed countries, 1 percent increase in telephone users increases the export of goods by 2.8%
and export of services by 1.4%. In case of emerging Asia 1 percent increase in ICT, increases the
exports of goods by 0.6% and export of services by 0.5%. Studies of Mbekeani (2007) Ijaiya and
Akanbi (2009), Ghalandri (2013) and Asma et al. (2011) confirm these findings.

Private credit access, which is used as a proxy of business environment, is positively related with the
exports of goods and services in the full panel. This confirms the belief that export performance of a
country is positively related with the business environment of a country. Results reported in Table
6.7 reveal that 1 percent increase in private credit access increases the export of goods by 1.4% and
export of services by 1.2% in developed countries. In emerging Asian countries 1 percent increase in
private access, increases exports of goods by 0.8% in case of goods and 1.2% in case of services.
Studies of Ghani and Clemes (2013), Angaw and Demissie (2001) and of Aubion and Engemann
(2012) confirm these findings.

Wages has positive relationship with the exports of goods as well as services. Low wages and salaries
are an important component in attracting foreign countries for outsourcing purposes. But this is
only a short term phenomena. In the long run, in order to hire more educated and skilled workers,
firms have to pay higher wages to them. So in the long run wage gap is an inadequate condition for a
nation to remain a significant player in outsourcing business. According to marginal productivity
theory, high wages are linked with high productivity as high wages are encouraging factor for
workers to enhance their productivity. China also reports the shortage of skilled labor so their rates
are increasing in many cities. Farrell, Kaka, and Sturze (2005) also showed that due to outsourcing
wages increases in many Indian cities dramatically. Mincer (1988), Gupta (1975) and Jones (2001)
also argued that according to marginal productivity theory, across countries lower wages are
associated with low productivity. Akerlof Gift Exchange Model (1984) also presented same

25
argument that when firms pay high wages to the workers, they feel obliged with repaying in the form
of the gift of higher effort level. So according to this theory loyalty of the workers is exchanged for
high wages and this loyalty results in high productivity. In developed countries 1 percent increase in
wages caused 1.4% increase in export of goods and 1.3% increase in export of services. Empirical
findings further show that a 1 percent increase in wages increases exports goods by 0.2% and export
of services by 0.03% in emerging Asian countries. Farrell, Kaka, and Sturze (2005), Muller and
Nordman (2006), Riker (2010) also confirmed these findings.

7. CONCLUSION AND POLICY IMPLICATIONS

7.1. Conclusion

Human capital is positively related with the export of goods and services in Asian countries.
Empirical findings show that as stock of human capital rises, it enhances the country’s attractiveness
as an outsourcing location, which in turn increases the exports of goods and services.

While making the decision about outsourcing, developed countries look at the ICT infrastructure of
the host country. Empirical findings of this study show that ICT is positively and significantly
associated with the export of goods and services. Lack of soft infrastructure is a major cause of
increase in trade cost in many developing countries, which affect their competitive strength. Foreign
companies while making decisions to outsource, particularly take into consideration the availability
of modern ICT infrastructure in the outsourcing location.

Country’s business environment is another important factor that influences exports of goods and
services. Sound business environment attract the foreign companies to outsource in emerging Asia,
our results confirms.
Low labor cost in Asian countries is a major attraction for countries like US, EU for outsourcing. In
addition, Asian countries provide low office cost occupancy, which is a real lure for companies from
developed countries. Low labor cost is a short term phenomena. In the long run as demand for
skilled labor increases, so in order to hire these workers firms have to pay high wages. Indian
experience shows that because of off shoring wages in India’s big cities have accelerated
dramatically. This provides an opportunity to other countries to offer outsourcing services to benefit
from the rising wages in major Asian locations of outsourcing.

26
7.2. Policy Implications
With increased global integration and rising costs in their own countries, developed countries are
inclined in searching viable outsourcing location. Developing countries provide an opportunity to
developed countries for outsourcing some of their production processes. In order to attract
developed countries to developing countries’ destinations the study calls upon Asian developing
countries to pay special attention to make their industries (manufacturing and services) more cost
effective. In addition, special attention need to be paid to further enhance quality of their human
capital stock, to improve efficiency of soft and hard infrastructures, to improve business
environment by curtailing cost of doing business.

In particular, we suggest the following:

1. Asian countries should expand their human capital stock to reap the benefits of outsourcing.
2. Asian countries should further reduce border restrictions to attract more outsourcing from
developed countries.
3. Countries like Pakistan and Thailand should take steps to provide sound business
environment to attract outsourcing from developed countries.
4. Wage inflation is taking place in China and India; other promising destinations such as
Thailand, Pakistan and Philippines need to take advantage of the rising wage cost in
established destinations of outsourcing.
5. Export of goods and services are highly dependent on an efficient and cost effective system
of movement of inputs, energy and communication network. So Asian countries need to
further improve the efficiency of their soft and hard infrastructures.

27
REFRENCES
Astreiou, D. and G.H. Stephen (2007), “Applied Econometrics: A Modern Approach Using Views
and Microfit.” In Revised Edition, Palgrave Macmillan. Green Writing: Romanticism and Ecology
James McKusick, Reprint Palgrave Macmillan.

Anagaw, B.K. and W.M. Demissie, (2001), “Determinants of Export Performance in Ethiopia: VAR
Model Analysis.” National Monthly Refereed Journal of Research in Commerce & Management.

Asma, N. (2011), “The Role of ICT Infrastructure on Malaysian Trade.” International Journal of
Economics and Management 5(1): 140-148.
Bhagwati, J. and T.N. Srinivasan (2004), the Muddle over Outsourcing. Journal of Economic Perspective,
18(4): 93-114.

Brüderl, J. (2005), “Panel Data Analysis.” University of Mannheim. Available at:

http://www2.sowi.uni-mannheim.de/lsssm/veranst/Panelanalyse.pdf

Banjree, P. (2001), “Development of Human and Physical Capital and Change in the Structure of
Exports in Developing Countries:” An Analytical Study. IWU Honors Projects Paper NO 14.

Barro, R.J. and J.W. Lee, (2000), “International Data on Educational Attainment: Updates and
Implication.”Available, http://www.earth.columbia.edu/sitefiles/file/about/director/pubs/042.pdf

Barro, R.J. and J.W. Lee (2010), “A New Data Set of Educational Attainment in the World 1950 ‐
2010” NBER Working Paper No. 15902.

Black, S.E. and J.W. Lynch, (1996), “Human Capital Investment and Productivity.”The American
Economic Association papers and proceedings 86(2).

Coase, R. (1937) The Nature of the Firm. Economica, 4: 386-405.

Contractor, F. J. and S.M. Mudambi (2008), The Influence of Human capital Investment on the
Exports of Goods and Services: An Analysis of Top 25 Services Outsourcing Countries. Journal of
Management International Review, 48(4): 433-445.

Chuang, Y.C. (2000), “Human Capital, Exports and Economic Growth.”A causality Analysis for
Taiwan, 1952-1995. Journal Review of International Economics, 8(4): 712-720.

Dixit, A. and A. Woodland (1982), The Relationship Between Factor Endowments and Commodity
Trade. Journal of International Economics, 13 (3-4): 201–214.

Gujrati, D. (2004) “Basic Econometrics.” 4th edition, pp.190.

Farrell, D., N.Sturze, S. and Kaka, (2005), “Ensuring India’s Offshoring Future.”The McKinsey
Quarterly, Special Edition: 74–83.

28
Ghalandri, K. (2013), “The Effect of Information and Communication Technology on Export
Performance of Iranian Firms.” Research Journal of Applied Sciences, Engineering and Technology 5(17):
4367-4372.

Ghani, A. and M.D. (Clemes, 2013, “Modeling the Effect of the Domestic Business Environment
on Service Trade.” Journal of Economic Modeling 35: 297-304.

Hitt, M. A., L. Bierman, K. Shimizu, and R. Kochhar (2001), Direct and Moderating Effects of
Human Capital on Strategy and Performance in Professional Service Firms: A Resource-Based
Perspective. Academy of Management Journal, 44(1): 13–28.

ILO (2014), “Statistics and Data Bases”. Available at: http://www.ilo.org/global/statistics-and-

databases/lang--en/index.htm

Kearney, A. T. (2014), “Making Offshore Decisions: A. T. Kearney’s Offshore Location

Attractiveness Index.”Available online at www.atkearney.com.

Levin, A. and L.K. Raut, (1997), “Complementarities between Human Capital and Exports in
Economic Growth:” Evidence from Semi Industrialized Countries. Available at
http://biblioteca.hegoa.ehu.es/system/ebooks/5327/original/

Muller, C. and C. Nordman, 2006), “Task Organization, Human Capital and Wages in Moroccan
Exporting Firms.” Credit Research Paper No. 08/12. NASSCOM (2014) http://www.nasscom.in/.

Olney, W.W. (2013), “The Composition of Exports and Human Capital.” Available at
http://web.williams.edu/Economics/wp/OlneyExportsandEducation.pdf.

Olayemi, S.O. (2012), Human Capital Investment and Industrial Productivity in Nigeria. International
Journal of Humanities and Social Sciences, 2(16).

Soprana, M. (2002), “Services Exports and Developing Countries: Competitiveness and Challenges
According to Mode of Supply.” Available at:
http://www.wti.org/fileadmin/user_upload/wti.org/1_masterprogramme/pdfs/Masters_thesis_Ma
rta%20Soprana.pdf.

Schank, T. (2008), “Higher Wages in Exporting Firms: Self Selection, Export Effect or Both? First
Evidence from German Linked Employer Employee Data.” Discussion Paper No.3359. Available at
http://ftp.iza.org/dp3359.pdf.

Skasen,J.R. and J.R. Munch,. (2006), “Specialization, Outsourcing and Wages.”Discussion Paper
No.1907.Available at http://ftp.iza.org/dp1907.pdf.

UNDP (2012), “Mean Years of Schooling.” United Nations Development Program, Available at:
http://data.un.org/DocumentData.aspx?id=324.

World Bank (2013), “World Development Indicators.” Available at:

http://data.worldbank.org/data-catalog/world-development-indicators.

29
 Appendix A1: Developing Countries: Public Spending on Education
Dependent variable: LOG(Manufacturing Exports)
Method: Panel EGLS (Cross-section SUR)
Sample:2000-2012 Periods Included:13 Cross-sections:6
Total (balanced) observations: 72
Variable Co-efficient Std. Error t-statistic Prob.
C 5.046736 0.214746 23.50091 0.0000
Log(Spending) 0.559602 0.024255 23.07132 0.0000
Tp 0.038850 0.002755 14.10314 0.0000
Wg 0.000309 6.16E-05 5.019673 0.0000
D(pc) 0.003290 0.001187 2.772627 0.0072
R-squared 0.989062 F-statistics 1514.651 0.0000

Dependent variable: LOG(Commercial Services Exports)

Method: Panel EGLS (Cross-section SUR)
Sample:2000-2012 Periods Included:13 Cross-sections:6
Total (balanced) observations: 72
Variable Co-efficient Std. Error t-statistic Prob.
C 0.087542 0192695 0.454304 0.6511
Log(Spending) 1.009532 0.020197 49.98526 0.0000
Tp 0.001792 0.001136 1.577155 0.1195
Wg 0.000226 3.36E-05 6.736890 0.0000
D(pc) 0.001100 0.001045 1.052769 0.2962
R-squared 0.982839 F-statistics 959.2781 0.0000

30
 Appendix A2: Developed Countries: Public Spending on Education
Dependent variable: LOG(Manufacturing Exports)
Method: Panel EGLS (Cross-section SUR)
Sample:2000-2012 Periods Included:13 Cross-sections:6
Total (balanced) observations: 72
Co-
Variable Std. Error t-statistic Prob.
efficient
C -1.231602 0.344261 -3.57752 0.0008
Log(Spending) 0.901410 0.036459 24.7239 0.0000
Tp 0.030408 0.002262 13.44131 0.0000
D(Wg ) 0.055111 0.007032 7.836681 0.0000
D(pc) 0.000590 0.000529 1.115196 0.2704
R-squared 0.971466 F-statistics 400.04 0.0000

Dependent variable: LOG(Commercial Services Exports)

Method: Panel EGLS (Cross-section SUR)
Sample:2000-2012 Periods Included:13 Cross-sections:6
Total (balanced) observations: 72
Co-
Variable Std. Error t-statistic Prob.
efficient
C 1.186708 0.156725 7.57192 0.0000
Log(Spending) 0.814374 0.016843 48.35138 0.0000
Tp 0.003800 0.000474 8.015498 0.0000
D(Wg ) 0.030011 0.002112 14.21237 0.0000
D(pc) 0.000714 0.000151 4.735355 0.0000
R-squared 0.993842 F-statistics 1896.35 0.0000

31
 S3H Working Paper

01:2014 Exploring New Pathways to Gender Equality in Education: Does ICT Matter? by
Ayesha Qaisrani and Ather Maqsood Ahmed (2014), 35 pp.
02:2014 an Investigation into the Export Supply Determinants of Selected South Asian
Economies by Aleena Sajjad and Zafar Mahmood (2014), 33 pp.
03:2014 Cultural Goods Trade as a Transformative Force in the Global Economy: A Case of
Pakistan by Saba Salim and Zafar Mahmood (2014), 32 pp.
04:2014 Explaining Trends and Factors Affecting Export Diversification in ASEAN and
SAARC Regions: An Empirical Analysis by Shabana Noureen and Zafar Mahmood
(2014), 29 pp.
05:2014 In Search of Exchange Rate Undershooting in Pakistan by Wajiha Haq and Iftikhar
Hussain Adil (2014), 20 pp.
01:2015 A Time Series Analysis of Aggregate Consumption Function for Pakistan by Zakia
Zafar and Tanweer Ul Islam (2015), 13 pp.

View publication stats