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Foreign direct investment and spillovers: gradualism may be better

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  • Klaus Desmet
  • Felipe Meza
  • Juan A. Rojas

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. L’argument conventionnel suggère que l’investissement direct de l’étranger (IDE) devrait être promu et subventionné si des effets de retombée positifs existent. A contrario, ce mémoire suggère que l’existence même de ces retombées peut nécessiter qu’on restreigne temporairement les IDE. Cette argumentation se fonde sur deux caractéristiques des retombées: ces retombées sont limitées par la capacité de l’économie réceptrice à les absorber, et elles prennent du temps à se matérialiser. En laissant entrer ce capital graduellement, l’investissement initial a le temps de créer des retombées – et d’améliorer la capacité d’absorption de l’économie nationale – avant que d’autres investissements se produisent. L’économie nationale converge alors vers un régime permanent doté d’une technologie supérieure et d’un stock de capital plus important.

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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/Revue canadienne d'économique, John Wiley & Sons, vol. 41(3), pages 926-953, August.
  • Handle: RePEc:wly:canjec:v:41:y:2008:i:3:p:926-953
    DOI: 10.1111/j.1540-5982.2008.00491.x
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    2. Muhammad Ateeq ur REHMAN & Furman ALI & Shang XIE, 2022. "Impact of Foreign Investment News on the Return, Cost of Equity and Cash Flow Activities," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 112-127, December.
    3. Richard Harris, 2009. "Spillover and Backward Linkage Effects of FDI: Empirical Evidence for the UK," SERC Discussion Papers 0016, Centre for Economic Performance, LSE.
    4. 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, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 8(1), pages 21-35, April.
    5. Rodrigo Belo & Pedro Ferreira & Rahul Telang, 2016. "Spillovers from Wiring Schools with Broadband: The Critical Role of Children," Management Science, INFORMS, vol. 62(12), pages 3450-3471, December.
    6. Camilla Jensen, 2006. "Foreign Direct Investment and economic transition: Panacea or pain killer?," Europe-Asia Studies, Taylor & Francis Journals, vol. 58(6), pages 881-902.
    7. Herbert Dawid & Benteng Zou, 2017. "Foreign Direct Investment with Endogenous Technology Choice," Pacific Economic Review, Wiley Blackwell, vol. 22(1), pages 3-22, February.

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    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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