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Clusters As a Driving Engine for FDI

  • Etienne B. Yehoue
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    This paper develops a model that highlights the importance of clusters for attracting foreign direct investment. It shows from a game theoretical perspective how the combination of setting up a cluster and implementing policy reforms will be a key engine for attracting FDI. Based on agglomeration externalities, the paper shows that the very emergence of clusters can make investment so profitable that investors can even afford to tolerate more policyinduced distortions than otherwise. With perfect information, it shows the existence of multiple equilibria, in which some countries attract FDI while other do not. An extension to the context of imperfect information refines the analysis to a unique equilibrium, in which some investors respond to reforms. The paper presents case studies to support the findings.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=18495
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/193.

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    Length: 29
    Date of creation: 01 Oct 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/193
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    1. Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
    2. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
    3. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
    4. Atsushi Kajii & Stephen Morris, . "The Robustness of Equilibria to Incomplete Information," Penn CARESS Working Papers ed504c985fc375cbe719b3f60, Penn Economics Department.
    5. Kreye O & Heinrichs J & Frobel F, 1987. "Export processing zones in developing countries : results of a new survey," ILO Working Papers 251095, International Labour Organization.
    6. Schmitz, Hubert, 1995. "Small shoemakers and fordist giants: Tale of a supercluster," World Development, Elsevier, vol. 23(1), pages 9-28, January.
    7. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
    8. Paolo Surico, 2003. "Geographic Concentration and Increasing Returns," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 693-708, December.
    9. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
    10. repec:ner:tilbur:urn:nbn:nl:ui:12-73564 is not listed on IDEAS
    11. Carlsson, H. & van Damme, E.E.C., 1990. "Global games and equilibrium selection," Discussion Paper 1990-52, Tilburg University, Center for Economic Research.
    12. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    13. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
    14. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-91, June.
    15. Tornell, Aaron & Velasco, Andes, 1992. "The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1208-31, December.
    16. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
    17. Tibor Scitovsky, 1954. "Two Concepts of External Economies," Journal of Political Economy, University of Chicago Press, vol. 62, pages 143.
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