Is the Ukrainian economy’s absorptive capacity appropriate to attract foreign direct investment and facilitate economic growth?

• Published in: International journal of emerging markets 2018-11, Vol.13 (6), p.1928-1947
• Main Authors: Shevelova, Svitlana, Plaskon, Svitlana
• Format: Article
• Language: English
• Subjects: Absorptive capacity; Appropriateness; College students; Economic growth; Economic impact; Economic models; Economic reform; Emerging markets; Employees; Expansion; Expenditures; Foreign investment; Foreign subsidiaries; GDP; Grants; Gross Domestic Product; Growth models; Higher education; Human capital; Human resources; Innovations; Justification; Loans; Measurement; Multinational corporations; Panel data; R&D; Research & development; Research methodology; Spillover effect; Statistics; Transition economies
• ISSN: 1746-8809; 1746-8817
• DOI: 10.1108/IJoEM-03-2017-0090

Purpose Despite an increasing volume of literature focussed on foreign direct investment (FDI) in transition economies, there has been little research into FDI in Ukraine. The relationship between the inflows of FDI (IFDI) and absorptive capacity (AC) has been under-researched in the peripheral transition countries like Ukraine. The purpose of this paper is to analyse the appropriateness of the Ukrainian economy’s AC to attract IFDI and facilitate economic growth with a particular focus on AC factors, such as the potential of human resources to absorb innovation and benefit from research and development (R&D) expenditure. Design/methodology/approach This study presents a thoughtful research design: there is an analysis of the AC framework for justification and selection factors that allows a measurement of the potential of Ukraine’s AC to attract and exploit IFDI. The study uses data from 25 regions in Ukraine for the 1996–2015 period. To estimate the effects of IFDI on Ukrainian economic growth, a Cobb–Douglas production function is used. As an appropriate instrumentation technique for dynamic panel data, the Generalised Method of Moments is used to provide unbiased and efficient estimates of the results. The application of the interactive term in this study allows the authors to indicate the existence of complementarities between IFDI and human capital, in particular with higher education, that afford opportunity to absorb new technologies and benefit from IFDI. Findings The resulting model indicates that R&D expenditure benefited very significantly in evolving country’s innovation system due to economic growth. Physical and human capital has not been used effectively in Ukraine to facilitate economic growth and attract IFDI. The number of patents is not significant in all of the regression models. Moreover, IFDI in Ukraine for the 1996–2015 period did not significantly impact on economic growth. However, the AC of human capital, in particular those with a higher education, is relatively relevant to benefit from IFDI. Practical implications The findings have important implications for governmental policy, which should be based on improving the business climate, a strategy for digital development, innovation, migration, institutional and regional policies aimed at the achievement of country’s sustainable economic growth. The government should increase R&D expenditure as an important factor of gross domestic product growth and introduce grants, loans and o