In endogenous growth models, human capital and Research & Development (R&D) expenditure are not peripheral inputs but the central drivers of sustained growth. Unlike neoclassical models, where technological progress is treated as an unexplained external factor, endogenous growth theory internalizes innovation and knowledge creation, showing them as outcomes of purposeful economic decisions.

Human capital plays a dual role. First, it directly boosts productivity: a more skilled and educated workforce produces higher output per worker, often modeled by including human capital alongside physical capital in the production function. Second, it is vital for creating, disseminating, and absorbing new technologies. Without a sufficient stock of human capital, even high R&D spending would yield limited results. Human capital mitigates diminishing returns to physical capital, since knowledge is non-rivalrous and only partially excludable, allowing productivity gains to spread widely.

R&D expenditure represents deliberate investment in generating new knowledge, technologies, and products. Such investment drives innovation, improves existing techniques, and fuels productivity growth. Endogenous growth models often assume non-diminishing or even increasing returns to R&D, as knowledge spillovers benefit multiple firms and industries. A new general-purpose technology, for example, raises productivity economy-wide. R&D also fosters learning by doing and learning by investing, where innovation itself generates further opportunities for technological advancement, preventing the stagnation implied by exogenous models and enabling perpetual growth.

The relationship between human capital and R&D is synergistic. A highly educated workforce enhances the effectiveness of R&D, while successful innovations increase the demand for skilled labor, raising the returns to education and training. This virtuous cycle underpins sustained growth.

Therefore, policies that strengthen education, promote skill development, and incentivize R&D are central to long-run prosperity. Endogenous growth theory highlights that investment in people and knowledge is the key to self-sustaining economic progress.