Abstract
In order to formulate public policy consistent with attracting foreign investment and fostering regional development, this paper analyzes a model of local entrepreneur’s choices when they are affected by foreign direct investment (FDI) spillovers. FDI is determined by economies of agglomeration, market size, taxes, labor, and location costs. It is shown that location costs of the multinationals (MNE) affect the optimal quantity of MNE capital and regional development, while location costs and preferences of local entrepreneurs affect only their location and consumption. Other determinants of MNE location also impact regional development. The main policies advocated are as follows: provision of logistical infrastructure; creation and/or nurturing of pro-market institutions; non-discretionary policies; reduction of statutory tax rate; incentives to universities and research centers.
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