Knowledge Spillovers, Absorptive Capacities and the Impact of FDI on Economic Growth: Empirical Evidence from Transition Economies

In this paper we employ econometric analysis to investigate the impact of FDI and the related externalities on economic growth in transition economies. We contribute to recent literature by using more reliable measure of FDI while also depicting the character of FDI and related knowledge spillovers, as well as by examining the importance of technological and innovative capabilities in explaining the growth performance among transition economies, not previously studied. Overall, the results of our empirical analysis seem to render support to the hypothesis that FDI contribute to economic growth predominantly through knowledge spillovers, and that the higher level of technological development proxied by government and business R&D expenditures is associated with better growth performance among transition economies. Essentially, by the way we measure FDI in this analysis (i.e. the share of FDI in the manufacturing gross value added) and in the view of the integrated framework in which we study the relationship between FDI and economic growth, allows us to stipulate that the positive impact of FDI on economic growth is associated with more knowledge-capability and efficiency-seeking FDI.