Risk, Learning, and the Technology Content of FDI: A Dynamic Model

• Main Authors: CHANG, Pao Li, LU, Chia-Hui
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Foreign Direct Investment; Technology; Risk; Learning by Doing; Dynamic; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1163; https://ink.library.smu.edu.sg/context/soe_research/article/2162/viewcontent/FDI_Technology.pdf
• Institution: Singapore Management University

This paper builds a dynamic model of catching up to examine the policy stance of developing countries in attracting inward FDI. We show that the observably evident risk of FDI failure sets a minimum threshold on the South's technology capacity and furthermore creates a limit on the technology content of inward FDI. We provide economic foundations for the determinants of the FDI risk and formalize how the risk factor evolves over time as the South moves up its technology ladder. The model offers an insightful and tractable framework for empirical studies with a dynamic content, and reconciles many relevant empirical observations and policy implications.