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On the Magnet E®ect of Foreign Direct Investment

  • Pao-Li Chang

    (SMU)

  • Chia-Hui Lu

We extend Antras and Helpman (2004) on firm heterogeneity and organizational choice to a dynamic setting with FDI uncertainty, in which the probability of investment failure decreases with the host country's infrastructure level and increases with the technological complexity facing each firm. Moreover, it decreases over time as the accumulated mass of firms succeeding in FDI increases. We show that a minimum level of infrastructure is required to trigger a first wave of industrial migration. We then formalize the often noted "magnet effect" of FDI{the first wave of industrial migration generates positive externality (information spillover) for subsequent investors, which stimulates a second wave of industrial migration. The process continues until the power of the "magnet" reaches its steady-state level. In contrast with the predictions in Antras and Helpman (2004), we show that firms with intermediate productivity levels are the ones migrate first, while the most productive and the least productive firms tend to stay behind. This non-monotonic relationship between firms' productivity and their FDI propensities is consistent with the patterns of Taiwanese firms undertaking FDI in China.

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File URL: http://www.eaber.org/node/22060
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Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22060.

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Date of creation: Jan 2006
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Handle: RePEc:eab:financ:22060
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  2. repec:hrv:faseco:4784029 is not listed on IDEAS
  3. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
  4. Steven Globerman & Daniel Shapiro, 2003. "Governance infrastructure and US foreign direct investment," Journal of International Business Studies, Palgrave Macmillan, vol. 34(1), pages 19-39, January.
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