Technology and Human Capital Nexus in Saudi Arabia: Does Political Risk Matter?

Abstract

Technological innovation has been considered the most vital part of productivity growth since the pre-industrialization era. The importance of technological innovation has even more increased since industrialization. Although it is a resource-rich country, Saudi Arabia faces numerous challenges in terms of its human resources, the improvement of which is expected to influence future productivity in the country. For this reason, it is vital to analyse the extent to which technological innovation and human capital influence Saudi Arabia’s economic growth. To the best of our knowledge, neither the recently developed Global Innovation index nor GDP per capita have been used previously to assess these influences in the economy of Saudi Arabia. In methodological terms, this study uses a cointegration approach for an estimate of the empirical model. To assess the unit root properties of each series, this study continues with several unit root tests. For the long run cointegrating relationship among economic growth, human capital, innovation, consumption, investment and trade openness, this study uses the Johansen cointegration test. The short-run and long-run link amongst gross domestic product, human capital, innovation, consumption, investment and trade openness is tested by using the ARDL method. The Autoregressive Distributive Lag Model (ARDL) method indicates economic growth is positively affected by both innovation and human capital, as well as consumption, investment and openness of trade. These results are supported by robustness tests which confirm the association of increases in these variables with an increase in the growth rate of the real GDP. Technological innovation has remarkably increased productivity across the globe; however, Saudi Arabia possesses few endogenous technological capabilities and, hence, concentrates more on imports of technologies from the industrialized countries. Therefore, the policy makers should be careful in making policies that promote innovation and develop human capital.