Social capital, R&D and provincial growth in Indonesia

ABSTRACT

We propose and test the hypothesis that social capital is an important determinant of total factor productivity (TFP) growth. Using a new historical dataset on 33 Indonesian provinces covering the period 2010–18, we show that social capital enhances growth through research and development (R&D) expenditure. Our analysis is based on a modified endogenous growth model, and the estimations reveal that a unit standard deviation improvement in aggregate, tangible and intangible social capital, and religiosity improves TFP growth by at least 9.80% (of the mean TFP growth) through R&D spending. These results are robust.

KEYWORDS:

• social capital
• research and development expenditure
• total factor productivity growth
• Indonesia

JEL:

• O3
• O4

ACKNOWLEDGEMENTS

The authors thank the editors, Michael Fritsch (Associate Editor) and two anonymous reviewers for two rounds of valuable comments and suggestions that helped improve the quality of the paper.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. For a survey of these studies, see Juhro et al. (2020).

2. See https://warisanbudaya.kemdikbud.go.id/?tentang&active=pengertian%20dan%20domain%20warisan%20budaya%20takbenda/.

3. See, for instance, http://ksp.go.id/keragaman-jadikan-indonesia-bersatu.

4. See https://warisanbudaya.kemdikbud.go.id/?tentang&active=pengertian%20dan%20domain%20warisan%20budaya%20takbenda/.

5. See https://www.embassyofindonesia.org/index.php/basic-facts.

6. Some of Indonesia’s cultural heritage sites are acknowledged as World Heritage Sites by the United Nations Educational, Scientific and Cultural Organization’s (UNESCO) World Heritage Centre.

7. Some provinces use a different name, for example, in Gorontalo Province it is known as huyula.

8. We thank a reviewer for this insight.

9. We use the exponential growth function yt = αkt, where t is the time period; yt is the variable with missing observations; and k is a constant base for t.

10. We also implement the Granger causality test to further support this evidence. An advantage of the Granger causality test is that it can reveal a potential role of R&D spending in transmitting the influence of social capital to TFP growth. However, this test does not establish an economically robust transmission mechanism. That is, the Granger causality test cannot statistically establish R&D expenditure as a mediating variable in the relationship between social capital and TFP growth. Our unreported unconditional Granger causality test results can be summarized as follows: (1) R&D spending Granger-causes TFP growth, (2) social capital Granger-causes TFP growth and (3) social capital Granger-causes R&D spending. In all three cases, we can rule out reverse causality at the conventional levels of statistical significance. The implication from these estimates is that consistent with our hypothesis and the mediation test results, social capital influences R&D spending, which, in turn, influences TFP growth.

11. We thank a reviewer for pointing out this issue and recommending that we scale social capital by provincial population to address potential agglomeration effects.