The effect of foreign direct investment absorption capacity on growth and R&D expenditures

In theory, it is emphasized that Foreign Direct Investment (FDI) has a positive effect on economic growth, not only with the direct effect of contributing to the capital stock of the host country, but also with spillover effects. These spillover effects can be listed as follows: Providing creating employment, providing tax advantages, establishing Research and Development (R&D) centers, providing structural diversity, integrating production among countries, providing to the development of skills, technological knowledge and human capital. Among these effects, the contribution of FDIs, which are in a superior position in terms of information and technology compared to local companies, to the technology and human capital is of particular importance for economic development. At this point, the concept of "absorption, absorptive or absorptive capacity" comes to the fore for the host country in order to benefit from the direct and indirect benefits of the inward FDI and is increasingly being studied in the literature. In this context, the focus is on the host economy's ability to utilize on opportunities arising from significant FDI spillovers. Absorptive capacity refers to an economy's capacity and ability to meet the benefits provided by FDI. In this context, absorptive capacity factors are those that mediate FDI spillovers and affect an economy's ability to absorb knowledge and technology spillovers. These factors are human capital, financial development, trade openness, quality of institutions, R&D expenditures and infrastructure. The aim of the thesis is to calculate an absorptive capacity index with selected absorptive capacity factors fort the selected countries, including Turkey, in order to utilize the benefits of FDI, to determine Turkey its position with the selected countries in terms of absorptive capacity, to make policy recommendations for the selected countries, and to relate absorptive capacity to growth and R&D expenditures by considering it together with FDI. In this context, first of all, the absorptive capacity in the regard of measuring the ability of Turkey and some countries selected in the thesis in order to have benefits of FDI was calculated and compared. In the thesis, following the literature in determining the absorptive capacity, an absorptive capacity index was calculated by using the human capital index, trade openness, share of R&D expenditures in GDP and infrastructure factors. This index value is considered together with FDI and they are together associated with growth and R&D expenditures. Since all the variables related to the countries can be reached as of 1999, a panel data analysis was conducted for 19 years and 16 countries covering the years of 1999-2017, with the year of 1999 as the starting year. As a result of the panel data analysis, it was concluded that when FDI and absorptive capacity come together, it positively affects economic growth and R&D expenditures.