Foreign Direct Investment and Spillovers: Gradualism May Be Better
AbstractThe 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 such spillovers may require temporarily restricting and taxing inward FDI. Our argument in favour of gradual liberalization is based on two stylized features of spillovers: first, technology transfers – and subsequent spillovers – are limited by the economy’s absorptive capacity; and second, spillovers 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. This allows subsequent capital inflows to benefit from greater technology transfers. As a result, the economy converges to a steady state with a superior technology and a greater capital stock.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4660.
Date of creation: Oct 2004
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- Klaus Desmet & Felipe Meza & Juan A. Rojas, 2008. "Foreign direct investment and spillovers: gradualism may be better," Canadian Journal of Economics, Canadian Economics Association, vol. 41(3), pages 926-953, August.
- Klaus Desmet & Juan Rojas, 2004. "Foreign Direct Investment And Spillovers: Gradualism May Be Better," Economics Working Papers we040401, Universidad Carlos III, Departamento de Economía.
- F20 - International Economics - - International Factor Movements and International Business - - - General
- O30 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - General
- P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
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