Absorptive capacities and economic growth in low- and middle-income economies

Abstract

I extend the firm-level concept of absorptive capacity to a framework applicable to the national level in low- and middle-income countries (LMICs). Employing confirmatory factor analyses on 47 variables, I build 13 composite factors crucial to measuring six national level capacities: technological capacity, financial capacity, human capacity, infrastructural capacity, public policy capacity, and social capacity. Data cover most LMICs, eligible for the World Bank’s International Development Association (IDA) support between 2005 and 2019. I then analyze the relationship between the estimated capacity factors and economic growth, controlling for potential confounders. My results indicate that enhancing infrastructure, finance, business environment, specialized human capital, and public policy capacities improve economic growth. Finally, by ranking empirically important capacities for economic growth, I offer suggestions to cash-strapped governments and international organizations such as the World Bank, the UN, and the USAID to make effective investments to achieve sustainable development goals and boost shared prosperity.