CHAPTER 63

Trade, Foreign Investment, and

Industrial Policy for Developing
Countries!
Ann Harrison
University of California at Berkeley and NBER

Andrés Rodríguez-Clare
Pennsylvania State University and NBER

Contents
1. Introduction 4040
2. The Theoretical Justification for Industrial Policy 4043
2.1 Multiple equilibria and latent comparative advantage 4045
2.2 Industrial policy without latent comparative advantage 4052
2.3 Industrial policy as sector-specific collective action 4054
2.4 Self-discovery and diversification 4059
2.5 National and global gains from IP 4060
3. Empirical Evidence on Infant-Industry Protection and Other Forms of IP 4062
3.1 Single-industry studies 4063
3.2 Cross-industry studies 4065
3.3 Cross-country studies 4067
3.4 Export subsidies and other forms of IP 4070
4. Trade and Economic Development 4071
4.1 Stylized facts on trade policies, 1980–2004 4072
4.2 Cross-country evidence on trade policies, trade volumes, productivity,
and growth 4080
4.3 What can the different effects of trade volumes versus trade policy tell
us about the success of IP? 4091
4.4 Identifying the mechanisms for gains from trade 4095
5. Foreign Direct Investment 4099
5.1 FDI and productivity 4103
5.2 FDI and host-country factor markets 4108
6. Concluding Comments 4110
Appendix 4114
End Notes 4196
References 4198

Handbook of Development Economics, Volume 5 Doi 10.1016/B978-0-444-52944-2.00001-X

# 2010 Elsevier B.V. All rights reserved.

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