Foreign Direct Investment and Spillovers: Gradualism May Be Better

28 Pages Posted: 14 Jul 2008

See all articles by Klaus Desmet

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Felipe Meza

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Análisis e Investigación Económica

Juan A. Rojas

Banco de España

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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.

Suggested Citation

Desmet, Klaus and Meza, Felipe and Rojas, Juan A., Foreign Direct Investment and Spillovers: Gradualism May Be Better. Canadian Journal of Economics/Revue canadienne d'économique, Vol. 41, Issue 3, pp. 926-953, August/août 2008. Available at SSRN: https://ssrn.com/abstract=1158672 or http://dx.doi.org/10.1111/j.1540-5982.2008.00491.x

Klaus Desmet (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Felipe Meza

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Análisis e Investigación Económica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10700
Mexico

Juan A. Rojas

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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