Infrastructure and Industrial Development with Endogenous Skill Acquisition

The link between infrastructure and industrial development is studied in an OLG model with endogenous skill acquisition. Industrial development is defined as a shift from an imitation‐based, low‐skill economy to an innovation‐based, high‐skill economy, where ideas are produced domestically. Imitation generates knowledge spillovers, which enhance productivity in innovation. Changes in industrial structure are measured by the ratio of the variety of imitation‐ to innovation‐based intermediate goods. The model also distinguishes between basic infrastructure, which helps to promote learning by doing and productivity in imitation activities, and advanced infrastructure, which promotes knowledge networks and innovation. Numerical experiments, based on a parameterized version for a stylized low‐income country, show that changes in the level and composition of public investment in infrastructure may have significant effects on the structure of the labour force and the process of industrial development.