Human Capital Composition, R&D and the Increasing Role of Services

A growth model with endogenous innovation and accumulation of high-tech and low- tech human capital is developed. The model accounts for a recently established fact about human capital composition, which stated that \the richest countries are investing proportionally less than middle income countries in engineering and technical human capital', due to the consideration of a negative effect of technological development on the accumulation of high-tech human capital. Under this new and reasonable assump- tion, our model also accounts for other previously established stylized facts. Both the evolution of human capital composition and the transition across stages of development are endogenously determined. We relate an increasing R&D activity and a negative relationship between income and the ratio of high to low-tech human capital, both present in developed countries, to the transition to a services economy. Although all growth rates are optimal, we observe under-allocation of high-tech human capital to industry.