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THE PROVISION OF PUBLIC INPUTS AND FOREIGN DIRECT INVESTMENT

Authors

  • DEREK K. KELLENBERG

    1. Kellenberg: Assistant Professor, School of Economics, Georgia Institute of Technology, 781 Marietta St., NW, Atlanta, GA 30332-0615. Phone 1-404-894-4912, Fax 1-404-894-1890, E-mail Derek.Kellenberg@econ.gatech.edu
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      The author would like to thank Jim Markusen, Keith Maskus, Eckhard Janeba, Nick Flores, Michael Greenwood, and two anonymous referees for helpful comments. Any remaining errors are the responsibility of the author.


Abstract

A small open economy model is developed that incorporates direct and indirect effects on multinational location decisions associated with public input provision. It is shown that when agglomeration externalities are present in local intermediate goods markets, public input provision can affect multinational firms directly by lowering the fixed costs of production and indirectly by decreasing the costs of intermediate inputs, but growth is contingent on achieving a critical mass of investment. It is further shown that the effectiveness of a policy of public input provision over a policy of subsidy incentives is critically dependent on key market parameters in the host country. (JEL F2, H4, O1)

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