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Foreign direct investment and spillovers: gradualism may be better

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  • Klaus Desmet
  • Felipe Meza
  • Juan A. Rojas

Abstract

The standard argument says that in the presence of positive spillovers foreign direct investment should be promoted and subsidized. In contrast, this paper claims that the very existence of spillovers may require temporarily restricting FDI. Our argument is based on two features of spillovers: they are limited by the economy's absorptive capacity and they take time to materialize. By letting in capital more gradually, initial investment has the time to create spillovers - and upgrade the economy's absorptive capacity - before further investment occurs. The economy converges to a steady state with a superior technology and a greater capital stock.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 41 (2008)
Issue (Month): 3 (August)
Pages: 926-953

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Handle: RePEc:cje:issued:v:41:y:2008:i:3:p:926-953

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  1. Blomström, Magnus & Kokko, Ari, 1996. "Multinational Corporations and Spillovers," CEPR Discussion Papers 1365, C.E.P.R. Discussion Papers.
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Cited by:
  1. Wang, Chengqi & Deng, Ziliang & Kafouros, Mario I. & Chen, Yan, 2012. "Reconceptualizing the spillover effects of foreign direct investment: A process-dependent approach," International Business Review, Elsevier, vol. 21(3), pages 452-464.
  2. Richard Harris, 2009. "Spillover and backward linkage effects of FDI: empirical evidence for the UK," LSE Research Online Documents on Economics 33206, London School of Economics and Political Science, LSE Library.
  3. Richard Harris, 2009. "Spillover and Backward Linkage Effects of FDI: Empirical Evidence for the UK," SERC Discussion Papers 0016, Spatial Economics Research Centre, LSE.

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