The Economics of Foreign Direct Investment Incentives
27 Pages Posted: 28 Mar 2003
Date Written: February 2003
This Paper suggests that the use of investment incentives focusing exclusively on foreign firms - although motivated in some cases from a theoretical point of view - is generally not an efficient way to raise national welfare. The main reason is that the strongest theoretical motive for financial subsidies to inward FDI - spillovers of foreign technology and skills to local industry - is not an automatic consequence of foreign investment. The potential spillover benefits are realized only if local firms have the ability and motivation to invest in absorbing foreign technologies and skills. To motivate subsidization of foreign investment, it is therefore necessary, at the same time, to support learning and investment in local firms as well.
Keywords: Foreign direct investment, investment incentives
JEL Classification: J23, O12
Suggested Citation: Suggested Citation