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

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  • Pao-Li Chang

    () (School of Economics, Singapore Management University)

  • Chia-Hui Lu

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

Abstract

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.

Suggested Citation

  • Pao-Li Chang & Chia-Hui Lu, 2010. "Risk, Learning, and the Technology Content of FDI: A Dynamic Model," Working Papers 30-2010, Singapore Management University, School of Economics.
  • Handle: RePEc:siu:wpaper:30-2010
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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