Abstract:
The purpose of this paper is to investigate the role of inward foreign direct investment (FDI) in instigating a clustering process. In particular, the study examines the situation in which FDI is initially attracted to a region as a result of public policy initiatives rather than the existence of sophisticated local capabilities. Under these circumstances, the presence of large foreign-owned multinational corporations (MNCs) is shown to result in local knowledge transfers and regional reputation effects. These effects give rise to a clustering process, which contrary to other perspectives (PHELPS 2008), shows that external economies can be captured locally from FDI.
