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Foreign direct investment and spillovers: gradualism may be better

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Author Info
Klaus Desmet
Felipe Meza
Juan A. Rojas

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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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Publisher 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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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
O3 - Economic Development, Technological Change, and Growth - - Technological Change

References listed on IDEAS
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  1. Keller, Wolfgang, 1996. "Absorptive capacity: On the creation and acquisition of technology in development," Journal of Development Economics, Elsevier, vol. 49(1), pages 199-227, April. [Downloadable!] (restricted)
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  4. Gourinchas, Pierre-Olivier & Jeanne, Olivier, 2003. "The Elusive Gains from International Financial Integration," CEPR Discussion Papers 3902, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Wolfgang Keller, 2001. "International Technology Diffusion," NBER Working Papers 8573, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Nelson, Richard R & Pack, Howard, 1999. "The Asian Miracle and Modern Growth Theory," Economic Journal, Royal Economic Society, vol. 109(457), pages 416-36, July. [Downloadable!] (restricted)
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  8. Wolfgang Keller & Stephen R. Yeaple, 2003. "Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States," IMF Working Papers 03/248, International Monetary Fund.
    Other versions:
  9. Blomstrom, Magnus & Kokko, Ari, 1998. " Multinational Corporations and Spillovers," Journal of Economic Surveys, Blackwell Publishing, vol. 12(3), pages 247-77, July. [Downloadable!] (restricted)
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  10. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development. [Downloadable!]
  11. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "FDI policies under shared factor markets," Journal of International Economics, Elsevier, vol. 49(2), pages 309-332, December. [Downloadable!] (restricted)
  12. Alwyn Young, 1992. "A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 13-64 National Bureau of Economic Research, Inc. [Downloadable!]
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  14. Aizenman, Joshua & Yi, Sang-Seung, 1998. "Controlled Openness and Foreign Direct Investment," Review of Development Economics, Blackwell Publishing, vol. 2(1), pages 1-10, February. [Downloadable!] (restricted)
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  15. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May. [Downloadable!] (restricted)
  16. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, vol. 111(475), pages F723-39, November. [Downloadable!] (restricted)
  17. Eduardo Borensztein & Jong-Wha Lee & Jose De Gregorio, 1994. "How Does Foreign Direct Investment Affect Economic Growth," IMF Working Papers 94/110, International Monetary Fund.
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  18. Laffont, Jean-Jacques & Qian, Yingyi, 1999. "The dynamics of reform and development in China: A political economy perspective," European Economic Review, Elsevier, vol. 43(4-6), pages 1105-1114, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Richard Harris, 2009. "Spillover and Backward Linkage Effects of FDI: Empirical Evidence for the UK," SERC Discussion Papers 0016, Spatial Economics Research Centre, LSE. [Downloadable!]
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