By: Mellanie Hewlitt
Source: Singapore Review
Date: 8 Jan 2003
(First Published on Singapore Review)
http://groups.yahoo.com/group/Sg_Review/message/76
In the 4 Jan 2003 issue of the Straits Times (PhD pool to be
expanded with new
scholarships), Mr Philip Yeo adopted the analogy of PHDs as an
investment. Let
me play devil's advocate and apply simple Cost/Benefits analysis to
his
analogy.
"A full scholarship from undergraduate to PhD level, including
salary, fees and allowance, works out to a hefty $900,000 or so per
student."
When can we expect to recover initial CAPEX and outlay of $900k?
Definitely not
during the minimum 4-6 years when the scholar is completing his
PHD. This is
a "Holding Period" for the investment horizon.
Now let's see the Benefits side of the equation. Going along the
lines of Mr
Yeo's analogy, let us treat human capital like a stock or a bond
and apply
basic Valuation Theory where:
Total Expected ReturnPHD = Current YieldPHD + Capital Gains
YieldPHD
What is the Current Yield on the PHD "Talent"? PHD scholars are not
productive
assets and do not earn any cash returns whilst in school. Also,
unlike a share
(or bond) there is no dividend (or coupon) return during this 4
year Holding
Period. So Current Yield of PHD is virtually zero.
As for the Capital Gains Yield, that may or may not take place and
is a
function of the scholar's estimated salary (the price of the
investment) if and
when he does find gainful employment 4 years later. Unlike a share
or bond, you
also cannot "liquidate" a scholar. So what is the potential return
on a
PHD "Talent" in 4 years time? This potential return is even harder
to estimate
when you consider that there is a Risk Premium to be
weighted.
RISKS:
What is the Market Risk Premium here? There are several risks, the
first and
most obvious being that after the 4 year Holding Period, conditions
in the
labour market have changed so drastically that there is no avenue
for
employment of these highly trained professional scholars. In that
worst-case
scenario, the human capital will not reap any return at all.
Additionally, there is also the Asset Default Risk taken on the
actual stock
(or in this case the scholar himself). What happens if he fails the
course and
has to repeat an entire semester? This would delay his final entry
into the
labour market and increase the Hold Period which also increases the
window of
risk exposure. Or, what happens if we have a bond breaker? That
would mean the
entire investment has to be written off.
Finally, the Holding Period itself is a window of risk that may not
necessarily
be limited to only 4 years. Many of these graduates have already
been in
university for 3-4 years for their undergraduate degree before
embarking a
further 4 years on the PHD program. So this brings the sum total of
the
gestation period or 'holding period to 7-8 years. Factor in another
2-3 years
in full time National Service, this would mean that the scholar
will be close
to 30 years old before he is finally ready to start work. Of cause,
one way to
reduce this risk is to have the scholar pursue his PHD course
whilst gainfully
employed.
So, is a PHD Talent worth $900k? The above valuation theory is
unable to
confirm this conclusion.
What then is the object of this entire PHD exercise? Quoting A*Star
chairman
Philip Yeo, "Eventually, they (the PHD scholars) will become a key
attraction
to multinational companies to move their high-end research projects
to
Singapore".
This is a rather ambiguous, distant and vague outcome to wager an
investment
on. The availability of research expertise is only one of a myriad
of factors
that will influence a foreign MNC's decision in setting up shop
here. Each MNC
will have its own individual needs and requirements. These
include
political/economic environment, logistical factors,
tax-incentives,
operating/production cost base, industrial factors, infrastructure
and support
the list goes on.
And let us also not forget that talent and expertise can be bought
and
imported. But I will not digress into a discussion on Foreign
Talent today.
Given those numbers and odds, it is understandable why there is
some doubt
regarding Mr Yeo's latest investment product and his overwhelming
fascination
with the accumulation of paper qualifications, which also begets
the question:
have we lost the better part of ourselves in this on-going paper
chase?
Perhaps its time to step back and look at things in
perspective.
