Comment

2668-08_Comment_Hanson.qxd 04/14/05 09:14 Page 175CommentGORDON H. HANSONA huge volume of research on the impact of foreign direct investment (FDI)on host countries now exists. The issue is of first-order policy importance.As sources of new technology and foreign capital, multinational firms havethe potential to be major contributors to economic development in poorcountries. In policy prescriptions for economic liberalization emanatingfrom Washington, the recommendation to remove barriers to FDI is stan-dard. However, the enthusiasm for FDI goes beyond the desire to liberal-ize capital markets. In many quarters, multinationals are seen as a catalystfor industrialization and so deserve special treatment through subsidies ortax breaks. Many countries now offer tax inducements to multinationals.In their helpful review of the literature, Lipsey and Sjöholm begin withthe observation that the enthusiasm for FDI among policymakers is puzzling.While the theoretical case for opening to FDI (and for liberalizing capitalmarkets in general) is solid, the case for subsidizing FDI depends on strongassumptions about the existence of positive spillovers associated withmultinationals. As Lipsey and Sjöholm point out, empirical support forpositive FDI spillovers is mixed, at best. The empirical results in the litera-ture are either hard to interpret (in the case of wage spillovers) or all overthe map (in the case of productivity spillovers).It is useful to consider ...