Dynamic link between Human Capital and Innovation in India: A Comparative Analysis of Two-Stage Least Squares and Three-Stage Least Square Estimators

Abstract

Human capital and innovation are widely recognized as key drivers of economic growth, especially in developing countries like India. The present study examines the bidirectional relationship between Human Capital and Innovation across 36 Indian states and Union territories. Using Principal Component Analysis, the researchers constructed Human Capital and Innovation Indexes. A simultaneous equation model was applied to analyze their interrelationship, addressing endogeneity and simultaneity bias via Two-Stage Least Squares (3SLS) methods. The 3SLS approach, which accounts for error correlation across equations, yielded more efficient estimates than the 2SLS.