Innovating to Invest: The Role of Basic Education

Abstract:

Despite the focus of entrepreneurial finance research on high-tech innovation, more than 75% of innovations are new processes and products in traditional manufacturing. I show that basic education is a key determinant of innovation in traditional industries. I document that manufacturers in European regions with 10% more high school graduates file 15% more patents, and invest 4% more in capital expenditures. To absorb spatially correlated unobservables, I construct Virtual Regions that only exploit the variation in basic education across nearby locations. To address the possibility of reverse causality, I establish that regional basic education persists for decades, and I use the quasi-exogenous diffusion of the printing press after 1450 to instrument for historical basic education. The results offer a human capital channel for innovation that feeds into the innovation-to-investment literature in finance.