Absorptive capacities, FDI and economic growth in a developing economy: a study in the Indian context

Abstract

PurposeThe purpose of the study is to examine the moderating impact of absorptive capacity on the foreign direct investment (FDI)–growth link using the data for the period 1995–2019.Design/methodology/approachThe authors apply the autoregressive distributed lag (ARDL) model and threshold analysis for empirical analysis.FindingsThe findings indicate that the link between FDI and economic growth is influenced indirectly by absorptive capacities, such as financial development, institutional quality, technological capability, and trade openness. However, while examining the linear FDI–growth nexus, the authors noticed that human capital and infrastructure did not affect the relationship; when the non-linearity in the link is considered, the authors noted that all absorptive capacities (including human capital and infrastructure), when interacted with FDI, have a positive effect on growth. Furthermore, FDI stimulates growth if the absorptive capacities have exceeded a certain threshold level.Research limitations/implicationsFrom a practical standpoint, it is reasonable to conclude that improving absorptive capacities is critical in order to perceive FDI as a growth driver.Originality/valueIndia has been able to position itself as a preferred destination for FDI (when the major economies are facing a sharp decline in FDI inflows) despite the Covid-19 pandemic. However, it still suffers from low growth. Although much of the literature admits that absorptive capacity is crucial for FDI to promote growth, no study in the case of India examines FDI–growth nexus conditioned upon absorptive capacity. Moreover, the authors have used threshold analysis for assessing the non-linearities in FDI–growth nexus contingent on absorptive capacity.

O papel do Investimento Direto Estrangeiro para o desenvolvimento da Capacidade Inovadora na Indústria de Energia Eólica Offshore Brasileira

“…After conducting an extensive literature review, we concluded that data on FDI flows in developing countries with emerging markets play an essential role in transferring technologies through their linkage to energy sector production chains, fostering the construction of renewable energy infrastructure (Mahbub & Jongwanich, 2019;Azam & Haseeb, 2021). Capital flows, in addition to encompassing the definitions of the theoretical lens of this paper, give organizations the ability to exchange capabilities and resources for their financial management in multinationals in the infrastructure sectors (Rocha et al, 2017;Ross, 2019;Azam & Haseeb, 2021;Gupta et al, 2022).…”

“…Capital inflows drive infrastructure advancement in developing economies by enabling the direction of investment flows to transportation, energy, sanitation, and health sectors (Ross, 2019;Azam & Haseeb, 2021;Gupta, Yadav, & Jain, 2022).…”

“…Finally, knowledge exploitation is defined as the ability to refine, expand, leverage, and create existing competencies (Todorova & Durisin, 2007). Furthermore, scholars who study FDI in the modern interpret absorptive capacity as a means for the exchange of information and knowledge between nations and an intermediary concept for the generation of spillover effects in international economies (Gupta et al, 2022;Yu, Zhang, Zhang, & Fan, 2022).…”

The mediating role of social dynamics in the influence of absorptive capacity and tacit knowledge sharing on project performance

“…Absorptive capacity is defined by Fayad and El Ebrashi (2022) as having two components: previous knowledge and degree of activity. Gupta et al. (2022) also reveal that members’ abilities are gained through work-related talents, as well as their academic foundation and experience, which may signify the depth of background knowledge already accumulated.…”

“…Absorptive capacity is defined by Fayad and El Ebrashi (2022) as having two components: previous knowledge and degree of activity. Gupta et al (2022) also reveal that members' abilities are gained through work-related talents, as well as their academic foundation and experience, which may signify the depth of background knowledge already accumulated. Despite having a significant intellectual ability, a person's capacity for absorption is limited if they lack or lack the will to study, which might affect project performances.…”