A project submitted to the Graduate School in partial fulfillment of the requirements for the degree

NATIONAL REALIZED ABSORPTIVE CAPACITY:

COUNTRY COMPARISONS

BY

LINH THI THUY DO, B.E., M.S.

A project submitted to the Graduate School

in partial fulfillment of the requirements

for the degree

DOCTOR OF ECONOMIC DEVELOPMENT

Major Subject: ECONOMIC RESEARCH

Minor Subject: APPLIED STATISTICS

NEW MEXICO STATE UNIVERSITY

LAS CRUCES, NEW MEXICO

NOVEMBER 2017

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“National Realized Absorptive Capacity: Country Comparisons,” a project prepared

by Linh Thi Thuy Do in partial fulfillment of the requirements for the degree Doctor

of Economic Development, has been approved and accepted by the following:

Loui Reyes

Dean of the Graduate School

Christopher Erickson

Chair of the Examining Committee

Date

Committee in charge:

Dr. Christopher Erickson, Chair

Dr. James Peach

Dr. Robert Steiner

Dr. Son Tran

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ACKNOWLEDGEMENTS

At first, I would like to emphasize my deepest gratitude to Dr. Christopher A.

Erickson, who is my supervisor, for his valuable comments and guidance during the

process of this study. Without his help, I cannot complete this project.

I am also grateful to my friends for the constructive discussions and useful

suggestions on any inaccuracy. All of them make a great contribution to the

completion of this project.

Finally, the sincere gratitude and appreciation go to my family for their

encouragement and mental support.

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VITA

February 24, 1987 Born in Thai Nguyen City, Vietnam

2005 Graduated from Thai Nguyen Specialized Upper Secondary

School, Vietnam

2009 Graduated from Foreign Trade University

Hanoi, Vietnam

2012 Graduated from University of Essex,

Colchester, the United Kingdom

2014-2017 Research Assistant and Teaching Assistant

Department of Economics, Applied Statistics, and International

Business, College of Business

New Mexico State University

Field of Study

Major Field: Economic Development

Minor Field: Applied Statistics

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ABSTRACT

This project investigates the association between the level of economic

activity and national realized absorptive capacity. Absorptive capacity is a dynamic

process that has four dimensions: acquisition, assimilation, transformation, and

exploitation of the external knowledge. From macroeconomic perspectives, national

absorptive capacity can be defined as the process by which a nation internalizes

external resources for its economic growth. The literature shows that many variables,

including development level, drive the dynamics of national absorptive capacity. We

distinguish between a nation’s potential and realized absorptive capacity, then use

data from the World Bank to empirically identify if there are significant differences in

realized absorptive capacity among nations grouped into the four income categories

defined by the World Bank. The association between the change in foreign direct

investment net inflows as the percentage of gross domestic product and a country’s

growth of real gross domestic product is used as the indicator of the nation’s realized

absorptive capacity. We estimate fixed effects regressions, which show that countries

are different in their national realized absorptive capacity. The regression results

reject the null hypothesis that countries at higher level of development have higher

national realized absorptive capacity. We further find evidence that investment in

infrastructure has positive associations with national realized absorptive capacity.

Keywords: national realized absorptive capacity, foreign direct investment, economic growth.

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TABLE OF CONTENTS

List of Tables .............................................................................................................. vii

List of Figures............................................................................................................ viii

1. Introduction................................................................................................................1

2. Methodology..............................................................................................................7

Step 1 – Estimating National Realized Absorptive Capacity....................................7

Step 2 – Identifying Determinants of National Realized Absorptive Capacity.......11

3. Data and Estimation Techniques .............................................................................13

4. Results......................................................................................................................16

Tests of stationarity, cointegration, and Granger causality ...................................16

Step 1- Estimates of National Realized Absorptive Capacity .................................20

Step 2 – Determinants of National Realized Absorptive Capacity .........................34

5. Conclusions and Policy Implications.......................................................................41

Appendix 1 – List of countries included in the sample ...............................................45

Appendix 2 –Descriptive Statistics..............................................................................46

Appendix 3: Regression results for models in Table 3................................................48

Appendix 4: Estimates of national realized absorptive capacity .................................53

Appendix 5: STATA commands .................................................................................57

References....................................................................................................................64

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LIST OF TABLES

Table 1: Unit root tests for the %∆FDI and the %∆GDP ............................................17

Table 2: Results of unit root tests for other explanatory variables..............................18

Table 3: Regression results for models with the dependent variable %∆GDP............26

Table 4: Variance Inflation Factor of variables as in the regressions of Table 3 ........30

Table 5: Regression results using the averaging method.............................................37

Table 6: Variance Inflation Factor of variables as in the regressions of Table 5 ........39