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Trade, Foreign Investment, and Industrial Policy for Developing Countries

Ann Harrison () and Andres Rodriguez-Clare ()

Chapter Chapter 63 in Handbook of Development Economics, 2010, vol. 5, pp 4039-4214 from Elsevier

Abstract: In this chapter 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 no support for hard interventions that distort prices to deal with Marshallian externalities, learning by exporting, and knowledge spillovers from FDI. Nevertheless, we still envision an important role for what we refer to as soft industrial policy. The goal is to develop a process whereby government, industry and cluster-level private organizations can collaborate on interventions to increase productivity. We suggest programs and grants to help particular clusters by improving the formation of skilled workers, technology adoption, regulation and infrastructure.

Keywords: trade; foreign investment; industrial policy; agglomeration (search for similar items in EconPapers)
JEL-codes: L50 L51 O12 O13 (search for similar items in EconPapers)
Date: 2010
ISBN: 978-0-444-52944-2
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:eee:devchp:v:5:y:2010:i:c:p:4039-4214

DOI: 10.1016/B978-0-444-52944-2.00001-X

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