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Clusters As a Driving Engine for FDI


  • Etienne B Yehoue


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.

Suggested Citation

  • Etienne B Yehoue, 2005. "Clusters As a Driving Engine for FDI," IMF Working Papers 05/193, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:05/193

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    References listed on IDEAS

    1. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
    2. Schmitz, Hubert, 1995. "Small shoemakers and fordist giants: Tale of a supercluster," World Development, Elsevier, vol. 23(1), pages 9-28, January.
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    7. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-391, June.
    8. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    9. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
    10. Tibor Scitovsky, 1954. "Two Concepts of External Economies," Journal of Political Economy, University of Chicago Press, vol. 62, pages 143-143.
    11. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
    12. repec:ilo:ilowps:251095 is not listed on IDEAS
    13. Kreye O. & Heinrichs J. & Frobel F., 1987. "Export processing zones in developing countries : results of a new survey," ILO Working Papers 992510953402676, International Labour Organization.
    14. Atsushi Kajii & Stephen Morris, 1997. "The Robustness of Equilibria to Incomplete Information," Econometrica, Econometric Society, vol. 65(6), pages 1283-1310, November.
    15. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
    16. Paolo Surico, 2003. "Geographic Concentration and Increasing Returns," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 693-708, December.
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    Cited by:

    1. Marco Sanfilippo & Adnan Seric, 2016. "Spillovers from agglomerations and inward FDI: a multilevel analysis on sub-Saharan African firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(1), pages 147-176, February.
    2. Ewa Bojar & Matylda Bojar & Tomasz Sminda, 2008. "The Clusters As A Factor Attracting Foreign Direct Investments In Less Developed Regions," Romanian Journal of Regional Science, Romanian Regional Science Association, vol. 2(1), pages 54-67, June.
    3. Marco Sanfilippo & Adnan Seric, 2014. "Spillovers from agglomerations and inward FDI. A Multilevel Analysis on SSA domestic firms," RSCAS Working Papers 2014/76, European University Institute.

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