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Foreign Direct Investment And Spillovers: Gradualism May Be Better

  • Klaus Desmet


  • Juan Rojas


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
Date of revision:
Handle: RePEc:cte:werepe:we040401
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  1. 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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  9. Nelson, Richard R. & Pack, Howard, 1998. "The Asian miracle and modern growth theory," Policy Research Working Paper Series 1881, The World Bank.
  10. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
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  12. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, vol. 111(475), pages F723-39, November.
  13. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "FDI policies under shared factor markets," Journal of International Economics, Elsevier, vol. 49(2), pages 309-332, December.
  14. Joshua Aizenman & Sang-Seung Yi, 1997. "Controlled Openness and Foreign Direct Investment," NBER Working Papers 6123, National Bureau of Economic Research, Inc.
  15. 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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  17. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  18. Laffont, Jean-Jacques & Qian, Yingyi, 1999. "The dynamics of reform and development in China: A political economy perspective," European Economic Review, Elsevier, vol. 43(4-6), pages 1105-1114, April.
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