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Foreign Direct Investment And Spillovers: Gradualism May Be Better

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  • Klaus Desmet

    ()

  • Juan Rojas

    ()

Abstract

In contrast to the standard literature, we show that the presence of spillovers may justify temporarily restricting the inflow of foreign direct investment. Our argument 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 capital in 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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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we040401.

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Date of creation: Jan 2004
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Handle: RePEc:cte:werepe:we040401

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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.
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  9. 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.
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  11. Blomström, Magnus & Kokko, Ari, 1996. "Multinational Corporations and Spillovers," Working Paper Series in Economics and Finance 99, Stockholm School of Economics.
  12. Wolfgang Keller, 2001. "International Technology Diffusion," NBER Working Papers 8573, National Bureau of Economic Research, Inc.
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  14. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
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  18. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "FDI policies under shared factor markets," Journal of International Economics, Elsevier, vol. 49(2), pages 309-332, December.
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Cited by:
  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.
  2. 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.
  3. Gamal Atallah, 2009. "A Three-Period Analysis of R&D Spillovers in the Presence of an Industry Life Cycle Pattern," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 8(1), pages 21-35, April.

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