FDI impact: catalyzing digital capabilities in host nations

Abstract

Purpose This study aims to investigate the impact of foreign direct investment (FDI) on national digital capability, specifically differentiating the impact between FDI greenfield and mergers and acquisitions (M&A). The research also investigates factors shaping digital capabilities, encompassing government transparency and absorptive capability, while exploring the mediating influence of absorptive capability in the FDI–digital capability relationship.

Design/methodology/approach An econometric model has been developed to examine the interrelationship between national digital capability, FDI inflows, national absorptive capability and government transparency. The data set encompasses 55 countries over a period of nine years (2013–2021). National digital capability data is derived from the well-established index published by the World Competitive Centre (WCC). The sources of the explanatory variables align with standard practices, drawing from reputable institutions (UNCTAD and the World Bank, among others).

Findings The findings reveal a significant positive impact of FDI, particularly in greenfield investments, on national digital capability. Government transparency and research and development (R&D) investment are crucial factors contributing to digital capabilities. Additionally, the absorptive capacity, reflected by R&D investment, also emerges as a potential moderating factor, influencing the impact of FDI inflows on digital capabilities.

Practical implications The results recommend that policymakers and stakeholders should carefully consider the role of FDI, especially in greenfield investments, as a catalyst for enhancing national digital capability. The findings also underscore the significance of promoting government transparency and directing investments towards R&D to nurture digital capabilities. Moreover, understanding the mediating role of absorptive capability can inform strategies aimed at optimizing the impact of FDI on digital capabilities.

Originality/value This study contributes uniquely to the existing literature by being the first to systematically explore the influence of FDI on national digital capability. Furthermore, it presents innovative empirical findings on the role of absorptive capability in enhancing the FDI impact on national digital capability, an area that remains relatively uncharted in current literature.