Using a simultaneous equation model, the present study attempts to empirically, investigate the interrelationship between human capital and innovation in Indian context. The study is conducted by taking all the 36 Indian states and Union territories into consideration from a regional perspective, focusing mainly on the quantification of the factors used. Since the simultaneous equation model is often subject to the problem of simultaneous bias and endogeneity, instrumental variable method using Two Stage Least Squares (2SLS) has been utilised to overcome the issue. In fact, the 2SLS provides the evidence of bidirectional spatial causality between human capital and innovation for Indian states, which holds significant policy implications for the country. Given a large demographic dividend in the form of highest working age population in the world, India could reap its benefits by promoting investments in the soft infrastructure such as health, education, and labour skills. This could help to boost its economic growth in the long run.

Highlights

• This study constructs human capital index and innovation index for 36 Indian states and union territories using principal component analysis.
• Using a simultaneous equation model, the study investigated the inter-relationship between human capital and innovation for Indian states.
• This study provides empirical evidence of a two-way relationship between human capital and innovation for Indian states