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Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents

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  • Pica, Giovanni
  • Rodríguez Mora, José V.

Abstract

We study the distributional effects of globalization within a model of heterogeneous agents where both managerial talent and knowledge of the local economic environment are required in order to become a successful entrepreneur. Agents willing to set up a firm abroad incur a learning cost that depends on how different the foreign and domestic entrepreneurial environments are. In this context, we show that globalization fosters FDI and raises wages, output and productivity. However, not everybody wins. The steady state relationship between globalization and income is U-shaped: high- and low-income agents are better off in a globalized world, while middle-income agents (domestic entrepreneurs) are worse off. Thus, consistently with recent empirical evidence, the model predicts globalization to increase inequality at the top of the income distribution while decreasing it at the bottom.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 85 (2011)
Issue (Month): 1 (September)
Pages: 86-101

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Handle: RePEc:eee:inecon:v:85:y:2011:i:1:p:86-101

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Distributional effects of globalization Heterogeneous agents Income inequality Endogenous TFP Multinational firms;

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References

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Citations

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Cited by:
  1. Busse, Matthias & Groizard, Jose Luis, 2006. "Foreign direct investment, regulations, and growth," Policy Research Working Paper Series 3882, The World Bank.
  2. Valkonen, Laura, 2006. "Deregulation as a Means to Increase Competition and Productivity," Discussion Papers 1014, The Research Institute of the Finnish Economy.
  3. Busse, Matthias & Groizard Cardosa, José Luis, 2006. "FDI, Regulations and Growth," Proceedings of the German Development Economics Conference, Berlin 2006 6, Verein für Socialpolitik, Research Committee Development Economics.
  4. Pica, Giovanni & Rodríguez Mora, José V., 2011. "Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents," Journal of International Economics, Elsevier, vol. 85(1), pages 86-101, September.
  5. Marco Pagano & Giovanni Pica, 2012. "Finance and employment," Economic Policy, CEPR & CES & MSH, vol. 27(69), pages 5-55, 01.

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