Foreign Direct Investment and Spillovers: Gradualism May Be Better

Klaus Desmet and Juan Rojas

No 4660, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The standard argument says that in the presence of positive spillovers foreign direct investment should be promoted and subsidized. In contrast, this Paper claims that the very existence of such spillovers may require temporarily restricting and taxing inward FDI. Our argument in favour of gradual liberalization is based on two stylized features of spillovers: first, technology transfers ? and subsequent spillovers ? are limited by the economy?s absorptive capacity; and second, spillovers take time to materialize. By letting in capital more gradually, initial investment has the time to create spillovers ? and upgrade the economy?s absorptive capacity ? before further investment occurs. This allows subsequent capital inflows to benefit from greater technology transfers. As a result, the economy converges to a steady state with a superior technology and a greater capital stock.

Keywords: Foreign direct investment; Gradualism; Big bang; Spillovers; Liberalization; Absorptive capacity; Transition economies (search for similar items in EconPapers)
JEL-codes: F20 O30 P20 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-dev
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP4660 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Foreign direct investment and spillovers: gradualism may be better (2008)
Working Paper: Foreign direct investment and spillovers: gradualism may be better (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4660

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4660

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().