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The Economics of Foreign Direct Investment Incentives

  • Blomström, Magnus

    ()

    (European Institute of Japanese Studies)

  • Kokko, Ari

    ()

    (European Institute of Japanese Studies)

This paper suggests that the use of investment incentives focusing exclusively on foreign firms, although motivated in some cases from a theoretical point of view, is generally not an efficient way to raise national welfare. The main reason is that the strongest theoretical motive for financial subsidies to inward FDI – spillovers of foreign technology and skills to local industry – is not an automatic consequence of foreign investment. The potential spillover benefits are realized only if local firms have the ability and motivation to invest in absorbing foreign technologies and skills. To motivate subsidization of foreign investment, it is therefore necessary, at the same time, to support learning and investment in local firms as well.

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Paper provided by The European Institute of Japanese Studies in its series EIJS Working Paper Series with number 168.

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Length: 25 pages
Date of creation: 01 Jan 2003
Publication status: Published in Foreign Direct Investment in the Real and Financial Sector of Industrial Countries, Herrmann, H. , Lipsey, R.E. (eds.), 2003, pages 37-56, Springer Verlag, Hamburg.
Handle: RePEc:hhs:eijswp:0168
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