Foreign direct investment and spillovers: gradualism may be better

Klaus Desmet, Felipe Meza and Juan Rojas

Canadian Journal of Economics/Revue canadienne d'économique, 2008, vol. 41, issue 3, 926-953

Abstract: 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 spillovers may require temporarily restricting FDI. Our argument is based on two features of spillovers: they are limited by the economy's absorptive capacity and they 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. The economy converges to a steady state with a superior technology and a greater capital stock. L’argument conventionnel suggère que l’investissement direct de l’étranger (IDE) devrait être promu et subventionné si des effets de retombée positifs existent. A contrario, ce mémoire suggère que l’existence même de ces retombées peut nécessiter qu’on restreigne temporairement les IDE. Cette argumentation se fonde sur deux caractéristiques des retombées: ces retombées sont limitées par la capacité de l’économie réceptrice à les absorber, et elles prennent du temps à se matérialiser. En laissant entrer ce capital graduellement, l’investissement initial a le temps de créer des retombées – et d’améliorer la capacité d’absorption de l’économie nationale – avant que d’autres investissements se produisent. L’économie nationale converge alors vers un régime permanent doté d’une technologie supérieure et d’un stock de capital plus important.

Date: 2008
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https://doi.org/10.1111/j.1540-5982.2008.00491.x

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)
Working Paper: Foreign direct investment and spillovers: gradualism may be better (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:canjec:v:41:y:2008:i:3:p:926-953

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