TECHNOLOGICAL ABSORPTION CAPABILITY AND TFP GROWTH IN PAKISTAN

Abstract

Total factor productivity (TFP) is not only influenced by the direct effects of human capital, R&D (i.e., internal technology building capabilities), embodied & disembodied forms of technology transfer and know-how through capital imports, FDI and use of foreign intellectual property rights (i.e., traderelated technology transfer activities), but importantly indirectly is affected by components like the interactive effects of machinery and equipment imports, royalties and licenses fee payments, FDI, human capital and R&D (i.e., foreign technology absorption capabilities). In this context, this study has analyzed all the above mentioned direct and indirect effects: internal technology building capabilities, trade-related technology transfer activities and foreign technology absorption capabilities. The ARDL technique demonstrates that stable long-run association exists amongst all the chosen variables. The results indicate that not only investment in human capital boost the TFP, but expenditures on R&D, imports of machinery and equipment are also crucial determinants of TFP growth. Surprisingly, FDI appears with a negative sign but the indirect effect of FDI through its interaction with human capital is positive. This indicates that FDI in the presence of human capital plays a favourable role in enhancing TFP. Moreover, the imports of machinery directly and indirectly, in association with both human capital and R&D, increase the growth of TFP. Royalties and licenses fee payments exert positive but statistically insignificant impact on the TFP growth. These findings provide evidence that internal technology building capabilities enhances the TFP growth significantly; while, embodied form of technology transfer (machinery and equipment imports) has a positive and significant impact on the growth of TFP; whereas, disembodied technology transfer (royalty and license fee payments) exerts positive but statistically insignificant impact on TFP growth. Furthermore, it also lends support for the existence of strong foreign technology absorption capabilities.