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Foreign direct investment and spillovers : gradualism may be better

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  • Desmet, Klaus
  • Meza, Felipe
  • Rojas, Juan A.

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

Paper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/4801.

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Length: 955 p.
Date of creation: Aug 2008
Date of revision:
Publication status: Published in Canadian Journal of Economics (2008-08) v.v. 41, p.926-953
Handle: RePEc:ner:carlos:info:hdl:10016/4801

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  1. Glass, Amy Jocelyn & Saggi, Kamal, 1998. "International technology transfer and the technology gap," Journal of Development Economics, Elsevier, vol. 55(2), pages 369-398, April.
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Cited by:
  1. 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.
  2. 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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