Working Paper No. 03-11

The Provision of Public Inputs and Foreign Direct Investment
Derek K. Kellenberg
October 2003

ABSTRACT

A general equilirium model of a small open economy 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, public input provision can affect firms directly by lowering the fixed costs of production and indirectly by decreasing the costs of intermediate inputs. It is further shown that a policy of public input provision that provides a threshold level of public inputs can generate greater increases in GNP for a host country than a policy of subsidies or tax incentives.

JEL classification: F2; H4; O1
Keywords: Public Infrastructure; Multinational Corporations; Intermediate Goods; Development

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