The Economics of Foreign Direct Investment Incentives

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 n spillovers of foreign technology and skills to local industry n 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.1 UNCTAD (2001:6-7) reports that nearly 95 percent of the 1,185 changes in national FDI legislation during the period 1991-2000 were favorable to foreign investors. A significant share of these changes focused on incentives and FDI promotion. 2 See UNCTAD (1996) and Brewer and Young (1997) for definitions of various FDI incentives.

Foreign direct investment and income inequality in Latin America: A sectoral analysis

“…Similarly, the human capital variable has a negative impact on income inequity, and this finding is robust under the different specifications. The literature shows that greater investment in human capital translates into a drop in income inequality, especially in developing economies (see Basu and Guariglia, 2007;Blomstrom and Kokko, 2003;Castelló and Doménech, 2002). This last finding is important, since education is highlighted by several studies as one of the most effective instruments for reducing poverty and inequality in developing economies, and should thus be treated as a relevant factor by public policymakers, especially when the policies concerned are redistributive in character.…”

Regional Innovation and Spillover Effects of Foreign Direct Investment in China: A Threshold Approach

“…However, knowledge transfer and spillovers are never unconditional. In the case of FDI, it is now widely recognised that technology or productivity spillovers are not automatic consequences of the entry or presence of multinational enterprises (Blomström and Kokko 2003;Kokko and Kravtsova, 2006). Rather, they depend on factors such as the technology gap between foreign and local firms and the absorptive capabilities of local firms Zanfei, 2003 andSawada, 2010).…”

Demonstration or congestion? Export spillovers in Sweden

“…Over the second half of the 1990's Sweden was the seventh largest recipient of foreign direct investment (FDI) globally and saw the percentage ratio of foreign to domestically owned firms rise by 10 percentage points to 27 per cent between 1990 and 2000 (Blomström and Kokko, 2003). Within the data we use in this study we calculate that the number of foreign-owned firms increased by 60 per cent between 1990 and 2001 (to 597 firms by 2001).…”