FDI and Absorptive Capacity in Emerging Economies

Inward FDI is believed to promote economic growth and transfer technology across countries. This led many economies to promote policies that encourage and support inward FDI. Researchers have been undertaking empirical research to determine whether inward FDI does in fact have the proclaimed effect on the economy. The findings from the studies on the spillover effects of FDI are mixed. More recent studies explain that it is not a matter of whether FDI influences the host country’s economy; but rather of whether the necessary factors for the existence of spillover effects are present. This raises the issue of what is known as the absorptive capacity of the country; that is, a country’s capacity or ability to absorb the benefits that FDI can offer. This study focuses on the absorptive capacity of emerging and MENA economies. The absorptive capacity factors examined are the following: human capital, trade openness, and institutional quality. The results indicate that FDI spillovers exist in emerging and MENA economies, yet are more evident when controlling for schooling as an absorptive capacity factor. Both trade openness and institutional quality appear to be of little influence on the FDI spillovers. Moreover, it appears that countries with lower schooling levels stand to benefit the most from FDI spillovers