Some home-country effects, especially those relating to know-how generation (see 4) Know-how), industrial upgrading (see 6) Industrial upgrading), and productivity (see 7) Productivity), depend on the prevalence of sufficient absorptive and learning capacity. A distinction can be made between absorptive capacity at the country- and firm-level, though both are interlinked (see Knoerich 2017):
a) At the country level, absorptive capacity refers to the prevalence in the home country of a supportive institutional, legal and policy environment; high levels of education and human capital; a technologically skilled workforce; and other economic, social and legal fundamentals (Mowery and Oxley 1995, Worldbank 2008).
b) At the company level, absorptive capacity is the ability of a firm to “recognize the value of new, external information, assimilate it, and apply it to commercial ends” (Cohen and Levinthal 1990, 128). This requires the parent company to possess prior knowledge related to the knowledge subsequently obtained through OFDI.
Key insights
- Studies have focused on the impact of absorptive capacity on the relationship between OFDI and productivity. While measuring absorptive capacity in various ways (such as R&D, human capital), they generally identify a positive influence for absorptive capacity (Chen, Lin, and Yabe 2019, Li et al. 2017, Huang and Zhang 2017, Tang and Altshuler 2015, Bodman and Le 2013).
- Greater absorptive capacity is also likely to support know-how and technology transfer, and industrial upgrading in the home economy (Perea and Stephenson 2018).
- OFDI policy and HCMs should aim at strengthening absorptive capacity in the home country, both at the country and firm level. Governments can strengthen domestic absorptive capacity through appropriate policies on science, education, the legal environment and other areas (UNESCAP 2020).
Interactions
A4) Know-how and technology: Absorptive capacity should strengthen the potential of OFDI to enhance home-country know-how and technologies.
A6) Industrial upgrading: Absorptive capacity could strengthen the relationship between OFDI and industrial upgrading in the home country.
A7) Productivity: Absorptive capacity strengthens the positive relationship between OFDI and productivity (Chen, Lin, and Yabe 2019, Li et al. 2017, Huang and Zhang 2017, Tang and Altshuler 2015, Bodman and Le 2013).
D7) Absorptive capacity: Home-country measures can aim to enhance the absorptive capacity of the home country and its firms.
Available Research Findings
Chen, Lin, and Yabe (2019): The positive impact of Chinese OFDI in the food industry between 2005 and 2013 on parent firm productivity was strengthened by R&D.
Li et al. (2017): Chinese manufacturing MNEs between 2002 and 2008 became more productive upon engaging in OFDI, especially those with stronger absorptive capacities.
Huang and Zhang (2017): OFDI made by Chinese manufacturing firms between 2002 and 2007 increased parent firm productivity. This effect was dependent on the absorptive capacity of the firms, with absorptive capacity pertaining to product innovation found to be more important than that related to process innovation.
Li et al. (2016): OFDI from China’s provinces between 2003 and 2010 had an impact on domestic innovation, and the existence of inward FDI strengthened this impact. While the study highlights the importance of domestic capabilities, absorptive capacity is not found to have a direct impact on the relationship between OFDI and innovation.
Tang and Altshuler (2015): United States OFDI between 1999 and 2009 resulted in productivity spillovers from MNEs to home-country suppliers. A firm’s absorptive capacity was critical in determining such spillovers, along a U-shaped curve where firms with high or low levels of technological capability enjoyed the greatest spillovers.
Bodman and Le (2013): OFDI contributes to productivity in the home country. The magnitude of this effect is larger with higher levels of human capital.