Foreign Direct Investment and Spillovers: Gradualism May Be Better Articles uri icon

authors

  • DESMET, KLAUS
  • MEZA GOIZ, FELIPE
  • ROJAS, JUAN A.

publication date

  • August 2008

start page

  • 926

end page

  • 953

issue

  • 3

volume

  • 41

International Standard Serial Number (ISSN)

  • 0008-4085

Electronic International Standard Serial Number (EISSN)

  • 1540-5982

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 thatthe 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.