Scandinavian Working Papers in Economics

EIJS Working Paper Series,
Stockholm School of Economics, The European Institute of Japanese Studies

No 168: The Economics of Foreign Direct Investment Incentives

Magnus Blomström () and Ari Kokko ()
Additional contact information
Magnus Blomström: European Institute of Japanese Studies, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Ari Kokko: European Institute of Japanese Studies, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

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

JEL-codes: J23; O12

25 pages, January 1, 2003

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