Patterns of foreign direct investment in poor countries

Abstract

This paper introduces endogenous adoption costs for productive assets in a Ramsey type growth model with international capital flows. There are two classes of productive assets: owner-specific and location-specific. Adoption costs are an increasing function of the level of technology embodied in the investor's owner-specific assets and a declining function of the host country's location-specific assets. In this setting the observed pattern of international capital flows is consistent with diminishing returns to capital. Further, our model predicts the sectoral allocation of investment and output observed in the South.