Working Paper: NBER ID: w9489
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: No keywords provided
JEL Codes: J23; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign investment (F21) | technology and skill spillovers to local firms (O36) |
| local firms' capacity and motivation to absorb foreign technologies and skills (F23) | technology and skill spillovers to local firms (O36) |
| foreign investment (F21) | national welfare (I39) |
| local firms' ability to leverage foreign technology (F23) | national welfare (I39) |
| investment incentives for foreign firms (F23) | national welfare (I39) |