c © Springer-Verlag 2004 Human capital, innovation capability and economic growth in Portugal, 1960–2001

Abstract. In maintaining that the main flaw in empirical studies on economic growth derives from the fact that they employSolow-style neoclassical growthmod-els, rather than testing actual endogenous growth theory, we examine the human capital-innovation-growth nexus, thus testing new growth theory more directly.We test its insights against the economic evolution of an individual country, Portugal, using time series data from 1960 to 2001. Estimates based on vector autoregres-sive and cointegration analysis seem to confirm that human capital and indigenous innovation efforts were enormously important to the economic growth process in Portugal during the period of study. In particular, the indirect effect of human cap-ital through innovation, emerges here as being critical, showing that a reasonably high stock of human capital is necessary to enable a country to reap the benefits of its indigenous innovation efforts. Key words Human capital – Innovation – Economic growth – Cointegration JEL Classification: C22, J24, O30, O40 The authors are grateful to two anonymous referees, Paulo Brito and the participants of the 2003 Portuguese Society for Economics Research (SPiE) in Lisbon, Portugal for helpful comments and suggestions. CEMPRE–Centro deEstudosMacroeconómicos e Previsão – is supported by the Fundação para a Ciência e a Tecnologia, Portugal, through the Programa Operacional Ciência, Tecnologia e Inovação (POCTI) of theQuadroComunitário deApoio III, which is financed by FEDERandPortuguese funds