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Risk, Learning, and the Technology Content of FDI: A Dynamic Model

  • Pao-Li Chang

    ()

    (School of Economics, Singapore Management University)

  • Chia-Hui Lu

    ()

    (Department of Economics and Finance, City University of Hong Kong)

This paper builds a dynamic model to examine the two-way interaction between FDI and the South's technology frontier. Inferior technology capacity in the South generates risk of production failure, which discourages inward FDI with high technology content. Only if the risk is not prohibitive does the first wave of FDI take place, which enables the South to learn from producing for multinationals and push forward its technology frontier. Consequently, the risk constraints are relaxed, which induces subsequent FDI with ever higher technology content. This reinforcing process implies an FDI agglomeration phenomenon and a magnified long-run policy impact.

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Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 30-2010.

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Length: 43 pages
Date of creation: Dec 2010
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:30-2010
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