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On the Magnet E®ect of Foreign Direct Investment

Author

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  • Pao-Li Chang

    (SMU)

  • Chia-Hui Lu

Abstract

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.

Suggested Citation

  • Pao-Li Chang & Chia-Hui Lu, 2006. "On the Magnet E®ect of Foreign Direct Investment," Finance Working Papers 22060, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:22060
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    References listed on IDEAS

    as
    1. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    2. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    3. Steven Globerman & Daniel Shapiro, 2003. "Governance infrastructure and US foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 19-39, January.
    4. repec:hrv:faseco:4784029 is not listed on IDEAS
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    More about this item

    Keywords

    FDI; investment; Antras and Helpman;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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