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Firm productivity, foreign direct investment and the host-country welfare: trade cost vs. cheap labor

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  • Arijit Mukherjee

    ()
    (University of Nottingham)

Abstract

We show that the relationship between higher productivity of the foreign firm and host country welfare depends on the reason for foreign direct investment (FDI). If the reason for FDI is to get the advantage of cheap labor, higher productivity of the foreign firm may reduce host-country welfare. Higher productivity of the foreign firm always increases host-country welfare if the reason for FDI is to save transportation costs but may reduce it if trade costs consist of tariffs. Thus, the present paper complements the recent literature on international trade that explores the effects of foreign firms' productivities on the incentives for FDI.

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File URL: http://www.accessecon.com/pubs/EB/2008/Volume6/EB-08F20001A.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 6 (2008)
Issue (Month): 23 ()
Pages: 1-8

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Handle: RePEc:ebl:ecbull:eb-08f20001

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Keywords: Cheap labor Foreign direct investment Host-country welfare Trade cost;

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  1. James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers, Queen's University, Department of Economics 380, Queen's University, Department of Economics.
  2. Saggi, Kamal, 2000. "Trade, foreign direct investment, and international technology transfer : a survey," Policy Research Working Paper Series 2349, The World Bank.
  3. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  4. Keith Head & John Ries, 2003. "Heterogeneity and the FDI versus Export Decision of Japanese Manufacturers," NBER Working Papers 10052, National Bureau of Economic Research, Inc.
  5. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, Elsevier, vol. 11(4), pages 531-551, November.
  6. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 300-316, March.
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