Absorptive Capacity and Economic Growth: How Does Absorptive Capacity Affect Economic Growth in Low- And Middle-Income Countries?



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This dissertation analyzes the economic growth dynamics of low- and middle-income countries (LMICs) eligible for the World Bank’s International Development Association (IDA) support. LMICs are prime candidates for development and innovation, but unfortunately, a lack of a suitable framework and poor data environments dent their value and representation. I cater to those issues by building and testing a framework of growth conditions (capacities in this dissertation) using secondary data from 82 LMICs and primary data from fieldwork in Pakistan. Specifically, I address the impact of national-level capacities on economic growth over time while controlling for confounders (including incoming skills). Capacities comprise technology and innovation, business environment and finance, human capital, infrastructure, public policy, and social policy, including welfare and inclusion. Inspired by management science and innovation system literature, the first chapter asserts the need for absorptive capacity approaches in measuring innovation and development processes in LMICs. The second chapter builds a new complete panel dataset with no missing values for 82 LMICs and establishes the reliability and suitability of the dataset in operationalizing the capacities in LMICs. The third chapter builds a framework of capacities in LMICs and tests the framework using machine learning and econometric approaches to examine how capacities affect economic growth in LMICs longitudinally. The fourth chapter classifies LMICs into five clusters to explore trends for policy implications: leading, walking, limping, crawling, and sleeping economies. Economic growth and capacities are higher in leading economies, followed by walking, limping, crawling, and sleeping. The findings highlight the criticality of infrastructure, finance, skilled human capital, and public policy capacities to enhance economic growth. Incoming flows and skills from abroad are also found to be relevant for economic growth in LMICs. Lastly, the fifth chapter conducts research through interviews and secondary content analyses in Pakistan and Bangladesh to ascertain qualitative findings. Analyses confirm the positive effects of some capacities on economic growth as well as the role of confounders in mitigating those effects. Overall, 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 prosperity.



Absorptive capacity, Economic development, Innovation, Low and middle income countries, Mixed methods, Science and technology