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The Economics of Foreign Direct Investment Incentives

  • Magnus Blomstrom
  • Ari Kokko

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9489.

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Date of creation: Feb 2003
Date of revision:
Publication status: published as Herrmann, Heinz and Robert Lipsey (eds.) Foreign direct investment in the real and financial sector of industrial countries. Heidelberg and New York: Springer, 2003.
Handle: RePEc:nbr:nberwo:9489
Note: ITI
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