FDI spillovers, New Industry Development, and Economic Growth
Résumé
The paper investigates the optimal strategy of a small open economy receiving
FDI in an optimal growth context. We prove that no domestic firm can enter
the new industry when the multinational enterprise’s productivity or the fixed
entry cost is high. Nevertheless, the host country’s investment stock converges
to a higher steady state than an economy without FDI. A domestic firm enters
the new industry if its productivity is high enough. Moreover, the domestic firm
can dominate or even eliminate its foreign counterpart.
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