Scandinavian Working Papers in Economics
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European Instiute of Japanese Studies, Stockholm School of Economics EIJS Working Papers Series

No 168:
The Economics of Foreign Direct Investment Incentives

Magnus Blomström () and 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: FDI; Incentives; Industrial policy; (follow links to similar papers)

JEL-Codes: J23; O12; (follow links to similar papers)

25 pages, January 1, 2003

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This paper is published as:
Blomström, Magnus and Ari Kokko, (2003), 'The Economics of Foreign Direct Investment Incentives' in Herrmann, H. and R.E. Lipsey (eds.) Foreign Direct Investment in the Real and Financial Sector of Industrial Countries, pages 37-56, Springer Verlag, Hamburg.

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