It was reported in sections of the media sometime last week that Guyana’s absorptive capacity is too low for significant spending of oil money–according to an Inter-American Development Bank (IDB) expert. This notion was also put forward some time ago by the Finance Minister. However, this assertion was never fully justified in an empirical manner by the proponents. This article therefore seeks to address this issue in terms of an understanding of absorptive capacity, and how a country effectively measure its absorptive capacity.
Essentially, absorptive capacity has been defined as a firm’s ability to recognize the value of new information, assimilate it and apply it to commercial ends–and it is studied in individuals, groups, firm and national levels. In other words, it involves the ability to recognize the value of information and knowledge deemed necessary for firms’ innovation process, to be able to acquire it, assimilate it, transform it and exploit it. Therefore, absorptive capacity increases a firm’s access, as well as usage of knowledge and information through collaboration with other actors. Thus, the absorptive capacity is a function of the firm’s skill base, its internal technological effort and its linkages with external sources of knowledge (Lall, 1992).
Research has shown that in order to identify, assimilate and adapt knowledge which is needed for innovation and to engage in interactive learning, accumulating qualified human capital is crucial. As indigenous firms in developing countries generally have only limited access to human capital, management skills and competences, it is deducible that their available absorptive capacity is insufficient. As such, owing to limited absorptive capacity, other firms in the system may find little incentives to interact with such perceivably low absorptive capacity firms (Tidd et.al, 2005). This in turn, may reduce chances of domestic firms to participate in interactive learning processes (Giuliani and Bell, 2005). Therefore, building human capital and training in specific industry needs, is the cornerstone of interactive learning.
It is important to note that in order to identify, select and acquire the external technological knowledge that might be relevant to the firm, the firm’s own technological effort is essential (Lall and Pietrobelli, 2005). In this regard, there are important differences between developed and developing countries:
First, the intensity and nature of technological effort is different if the purpose is to be a technological leader–that is, to create innovations – than if the purpose is to monitor and absorb technology that has been developed elsewhere as in the case of developing countries.
Secondly, there is the importance to distinguish between product-related technological capabilities and process-related technologies. In developing countries, technological effort is usually oriented towards the absorption of technologies developed elsewhere, rather than the development of own innovation. To this end, if the purpose is to absorb, it can be assumed that process-related technological efforts are more important.
While it is acknowledged in academic literature that facilitating the access to external sources of knowledge in developing countries have limited or no effect on development and economic growth prior to absorptive capacity building, the literature is limited when it comes to analyzing how the absorptive capacity can be built. This becomes especially crucial for developing countries. Owing to weaknesses in the institutional and organisational framework, indigenous firms face the challenge of building an adequate level of absorptive capacity to benefit from potential knowledge spillovers (Astrid et.al, 2008).
Against these backgrounds, it is disappointing when experts from notable international organisations make careless assertions about such subject matters that are largely unsupported by any sound evidentiary basis. In other words, these assertions are at best opinionated, in light of the fact that there is no study that the analyst is aware of that comprehensively seeks to measure the level of absorptive capacity in Guyana’s context.
On another note, relevant to today’s discussion, it was also recently reported in sections of the media, that another international oil expert, Andrew Bauer, asserted that saving oil money, but borrowing more for development makes no sense. This view is rather consistent with previous writings by this analyst’s Sovereign Wealth Fund series of articles featured earlier this year.
In this respect, Bauer put forward the argument that a SWF is a savings fund for a country that has large surplus funds, and it is used to invest in various financial instruments in the global capital markets. In other words: if Guyana earns $100 billion in oil revenues, and it is then locked away for investment in an SWF, in which those investments are going to earn, say, 5 or 10 % returns on investment, would this model be of any direct economic benefit to the people of Guyana? The answer is no. In the final analysis this analyst argued that Guyana does not need a SWF at the onset of oil production. Instead, a Stabilization Fund would be more appropriate–such that a greater portion of the oil revenues could or should be utilized to advance massive infrastructural developments among other crucial aspects of national development, which the country badly needs.
