Tight Clusters or Loose Networks? The Critical Role of Inward FDI in Cluster Creation

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.