Clusters can drive foreign investment

This according to Etienne Yehoue in his game theory approach to the role of clusters in attracting FDI. Some of his conclusions:

1. Locational factors combined with the policy reforms necessary to attract foreign investment can be costly for many developing countries. This leads governments in these countries to trade off the benefits of attracting foreign investment against the costs of creating business-friendly conditions in their countries…
2. Contrary to conventional wisdom, even if policy reforms are not complete, countries can succeed in attracting foreign investment…
3. A dense network of domestic firms can compensate for policy induced distortions and attract foreign investment.

The paper also includes case studies on shoe clusters in Brazil, export processing zones in Mauritius and the Danish networking system.