Trade, Foreign Investment, and Industrial Policy for Developing Countries
AbstractIn this chapter we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as industrial policy. We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review we find no support for hard interventions that distort prices to deal with Marshallian externalities, learning by exporting, and knowledge spillovers from FDI. Nevertheless, we still envision an important role for what we refer to as soft industrial policy. The goal is to develop a process whereby government, industry and cluster-level private organizations can collaborate on interventions to increase productivity. We suggest programs and grants to help particular clusters by improving the formation of skilled workers, technology adoption, regulation and infrastructure.
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This item is provided by Elsevier in its series Handbook of Development Economics with number v:5:y:2010:i:c:p:4039-4214.
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trade; foreign investment; industrial policy; agglomeration;
Other versions of this item:
- Ann Harrison & Andrés Rodríguez-Clare, 2009. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," NBER Working Papers 15261, National Bureau of Economic Research, Inc.
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
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