Clusters As a Driving Engine for FDI

October 1, 2005

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Etienne B Yehoue. Clusters As a Driving Engine for FDI, (USA: International Monetary Fund, 2005) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper develops a model that highlights the importance of clusters for attracting foreign direct investment. It shows from a game theoretical perspective how the combination of setting up a cluster and implementing policy reforms will be a key engine for attracting FDI. Based on agglomeration externalities, the paper shows that the very emergence of clusters can make investment so profitable that investors can even afford to tolerate more policyinduced distortions than otherwise. With perfect information, it shows the existence of multiple equilibria, in which some countries attract FDI while other do not. An extension to the context of imperfect information refines the analysis to a unique equilibrium, in which some investors respond to reforms. The paper presents case studies to support the findings.

Subject: Balance of payments, Foreign direct investment, Tax incentives

Keywords: Africa, Backward and forward linkages, Clusters, Expected return, FDI, Firm creation, Foreign direct investment, Foreign investor, Investment promotion policy, Investor group, Investors' decision, Investors face., Participating enterprise, Policy reform, Policy reforms, Shoe firm, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/193
Stock No:

WPIEA2005193
ISBN:

9781451862126
ISSN:

1018-5941

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