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The dynamic pattern of foreign direct investment (FDI) in developing countries shows a three-phase pattern. Despite government policies that promote it, initially the inflow of FDI is sluggish, followed by a period of considerable fluctuation before finally entering the stage of rapid growth. The paper explains the pattern through recourse to two concepts: the searching process of individual investors and the information externalities of investors in the aggregate. Policy implications that may serve to shift an economy of a developing country from small-scale FDI to one of rapidly expanding FDI are considered. As China is a clear example of this pattern, it has been selected to promote understanding of the process.

Balance of payments --- Environment --- Environmental Economics --- Environmental economics --- Environmental Economics: General --- Environmental sciences --- Exports and Imports --- Finance --- Foreign direct investment --- International Factor Movements and International Business: General --- International Investment --- Investments, Foreign --- Long-term Capital Movements --- Public finance & taxation --- Special economic zones --- Tax incentives --- Taxation --- Taxation, Subsidies, and Revenue: General --- Taxes --- China, People's Republic of

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The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Exports and Imports --- Foreign Exchange --- Labor --- Money and Monetary Policy --- Public Finance --- Demand for Money --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- Price Level --- Inflation --- Deflation --- Central Banks and Their Policies --- General Financial Markets: Government Policy and Regulation --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Comparative Studies of Particular Economies --- Computable and Other Applied General Equilibrium Models --- Neoclassical --- Taxation, Subsidies, and Revenue: General --- Empirical Studies of Trade --- Current Account Adjustment --- Short-term Capital Movements --- Studies of Particular Policy Episodes --- Socialist Systems and Transitional Economies: General --- Socialist Systems and Transitional Economies: Prices --- Socialist Systems and Transitional Economies: National Income, Product, and Expenditure --- Money --- Socialist Systems and Transitional Economies: Performance and Prospects --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Macroeconomics: Consumption --- Saving --- Wealth --- Open Economy Macroeconomics --- Economic Development: Agriculture --- Natural Resources --- Energy --- Environment --- Other Primary Products --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- International Finance: Other --- Market Structure and Pricing: General --- Socialist Systems and Transitional Economies: Factor and Product Markets --- Industry Studies --- Population --- Socialist Enterprises and Their Transitions --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Comparative Studies of Countries --- Urban, Rural, and Regional Economics: Housing Demand --- Housing Supply and Markets --- Expectations --- Speculations --- Hypothesis Testing --- Estimation --- Socialist Institutions and Their Transitions: Financial Economics --- One, Two, and Multisector Growth Models --- General Equilibrium and Disequilibrium: General --- Agriculture: General --- Geographic Labor Mobility --- Immigrant Workers --- International Investment --- Long-term Capital Movements --- Multinational Firms --- International Business --- Business Taxes and Subsidies --- International Fiscal Issues --- International Public Goods --- History of Thought: Macroeconomics --- International Monetary Arrangements and Institutions --- Monetary Policy --- Macroeconomic Aspects of International Trade and Finance: General --- Economic Growth of Open Economies --- Structure and Scope of Government: General --- National Government Expenditures and Related Policies: General --- Comparative Analysis of Economic Systems --- Firm Organization and Market Structure --- Retail and Wholesale Trade --- e-Commerce --- Fiscal Policies and Behavior of Economic Agents: General --- Accounting and Auditing: General --- Model Construction and Estimation --- Efficiency --- Optimal Taxation --- Taxation and Subsidies: Incidence --- Socialist Systems and Transitional Economies: Planning, Coordination, and Reform --- Index Numbers and Aggregation --- leading indicators --- Methodology for Collecting, Estimating, and Organizing Macroeconomic Data --- Data Access --- International Lending and Debt Problems --- Financial Institutions and Services: General --- Business Administration: General --- Corporate Culture --- Diversity --- Social Responsibility --- Accounting --- Economic History: Financial Markets and Institutions: General, International, or Comparative --- Economic History: Financial Markets and Institutions: Africa --- Oceania --- Development Planning and Policy: General --- Development Planning and Policy: Other --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- Social Security and Public Pensions --- Retirement --- Retirement Policies --- Unemployment Insurance --- Severance Pay --- Plant Closings --- Financial Aspects of Economic Integration --- International Factor Movements and International Business: General --- Trade Policy --- International Trade Organizations --- Mobility, Unemployment, and Vacancies: Public Policy --- Economic Development: Human Resources --- Human Development --- Income Distribution --- Migration --- Economic Development: Financial Markets --- Saving and Capital Investment --- Corporate Finance and Governance --- Economic Growth and Aggregate Productivity: General --- Money Supply --- Credit --- Money Multipliers --- Economics of the Elderly --- Economics of the Handicapped --- Non-labor Market Discrimination --- Organizational Behavior --- Transaction Costs --- Property Rights --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Economywide Country Studies: Europe --- Economic Integration --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Wage Level and Structure --- Wage Differentials --- Nonwage Labor Costs and Benefits --- Private Pensions --- Wages, Compensation, and Labor Costs: Public Policy --- Unemployment: Models, Duration, Incidence, and Job Search --- Debt --- Debt Management --- Sovereign Debt --- Regional Economic Activity: Growth, Development, and Changes --- International Policy Coordination and Transmission --- Fiscal Policy --- National Security and War --- Asymmetric and Private Information --- Macroeconomics: Production --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Trade: General --- Macroeconomics --- International economics --- Labour --- income economics --- Public finance & taxation --- Currency --- Foreign exchange --- Real exchange rates --- Monetary unions --- Currencies --- Commodity prices --- Economic integration --- Prices --- Labor market --- Exports --- United States --- E-Commerce --- Income economics --- Leading indicators