DP3775 The Economics of Foreign Direct Investment Incentives

Author(s): Magnus Blomström, Ari Kokko
Publication Date: February 2003
Keyword(s): Foreign direct investment, investment incentives
JEL(s): J23, O12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3775

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.