TY  - JOUR
AU  - Harrison,Ann
AU  - Rodríguez-Clare,Andrés
TI  - Trade, Foreign Investment, and Industrial Policy for Developing Countries
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15261
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15261
L1  - http://www.nber.org/papers/w15261.pdf
N1  - Author contact info:
Ann Harrison
Department of Agricultural
and Resource Econonmics
University of California, Berkeley
210 Giannini Hall
Berkeley, CA 94720
Tel: 510/643-9676
Fax: 510/643-8911
E-Mail: ann.harrison@berkeley.edu

Andres Rodriguez-Clare
University of California at Berkeley
Department of Economics
Berkeley, CA 94720-3880
E-Mail: andres1000@gmail.com
AB  - In this paper we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as "industrial policy". We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review, we find little evidence that countries benefit from "hard" interventions that distort prices to deal with Marshallian externalities, learning-by-exporting, and knowledge spillovers from FDI. We discuss an alternative set of "soft" industrial policies that deal directly with the coordination failures that may arise within the sectors or clusters where the country has a comparative advantage.
ER  -