NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Economics of Foreign Direct Investment Incentives

Magnus Blomstrom, Ari Kokko

NBER Working Paper No. 9489
Issued in February 2003
NBER Program(s):   ITI

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.

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Document Object Identifier (DOI): 10.3386/w9489

Published: Herrmann, Heinz and Robert Lipsey (eds.) Foreign direct investment in the real and financial sector of industrial countries. Heidelberg and New York: Springer, 2003.

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