Do we need universities to grow?

By | 4.9.2016

The presence of universities in a particular region is argued to have a positive effect on GDP per capita. To test this claim empirically, Valero and Reenen (2016) made use of a huge database of almost 15000 universities in 1500 regions. Their empirical exercise suggests that there is a positive and significant impact of the existence of a university in a region on the region’s GDP per capita and this conclusion seems to be robust to different specifications. They found that a doubled number of universities is associated with a 4% increase of GDP per capita.

Additionally, the authors identified four main channels through which the positive effect is likely to influence the economy. In particular, unsurprisingly, more universities increase human capital which is believed to increase productivity and thus the GDP per capita as well. Apart from human capital, universities and their environment strengthen innovation activity, measured by the number of registered patents. Further, it is widely known that institutions represent a key determinant of economic growth. Specifically, some of the institutions such as democracy and political culture are claimed to be necessary for growth, especially in developed countries. Finally, there is a direct effect of higher economic activity from the existence of the university in a particular region (construction of the buildings etc.) and higher demand from professors and students. The empirical results indicate that growth is driven by both human capital and innovation, though the effects of these are small in magnitude. The impact of democracy and institutions also seems to be positive although rather in the long term. To sum up, the authors conclude that the presence of universities impacts growth also in other ways than simply via the increase in demand caused by higher economic activity.

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Reference: Valero, A., & Van Reenen, J. (2016). The economic impact of universities: Evidence from across the globe (No. w22501). National Bureau of Economic Research. Available here.

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