Working Paper: CEPR ID: DP3775
Authors: Magnus Blomström; Ari Kokko
Abstract: 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 Codes: J23; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI incentives (F23) | national welfare (I39) |
| FDI incentives (F23) | positive spillovers of foreign technology and skills (O36) |
| local firms' capabilities (L25) | positive spillovers of foreign technology and skills (O36) |
| FDI incentives + local firms' learning and investment capacities (F23) | efficient outcomes (D61) |
| FDI incentives (F23) | inefficient outcomes (D61) |
| investment incentives (O31) | local industry development (O25) |