Trade, Foreign Investment, and Industrial Policy for Developing Countries

Ann Harrison and Andres Rodriguez-Clare

No 15261, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as "industrial policy". We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review, we find little evidence that countries benefit from "hard" interventions that distort prices to deal with Marshallian externalities, learning-by-exporting, and knowledge spillovers from FDI. We discuss an alternative set of "soft" industrial policies that deal directly with the coordination failures that may arise within the sectors or clusters where the country has a comparative advantage.

JEL-codes: F0 O1 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-cse, nep-int and nep-sbm
Note: ITI
References: Add references at CitEc
Citations: View citations in EconPapers (93)

Published as Ann Harrison, Andrés Rodríguez-Clare (2010), Trade, Foreign Investment, and Industrial Policy for Developing Countries, Handbook of Development Economics, Vol 5: 4039-4214. [Harrison - Published Paper]

Downloads: (external link)
http://www.nber.org/papers/w15261.pdf (application/pdf)

Related works:
Chapter: Trade, Foreign Investment, and Industrial Policy for Developing Countries (2010)
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:nbr:nberwo:15261

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15261

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().