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Foreign-owned Capital and Endogenous Tariffs

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  • Olarreaga, Marcelo

    () (The World Bank)

Abstract

During the last two decades we simultaneously observed an important increase in investment abroad and a rush towards free-trade worldwide. This paper argues that the former may (partially) help explain the latter. In a model of endogenous determination of trade protection through lobbying, where the government is also concerned by income redistribution among owners of foreign and national factors of production, entry of foreign capital into the host country will most likely reduce the endogenous level of protection. If the elastic - ity of substitution between labour and capital is sufficiently small, we show that protection cannot increase after the entry of foreign capital, regardless of the form of investment abroad (acquisition of existing domestic firms, or entry by foreign firms) or its trade orientation (whether foreign capital enters the export- or import-competing sector).

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 14 (1999)
Issue (Month): ()
Pages: 606-624

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Handle: RePEc:ris:integr:0119

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Web page: http://econo.sejong.ac.kr/
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Related research

Keywords: endogenous trade policy; foreign-owned firms;

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References

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  1. Helpman, Elhanan, 1995. "Politics and Trade Policy," CEPR Discussion Papers 1269, C.E.P.R. Discussion Papers.
  2. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  3. Schweinberger, Albert G & Vosgerau, Hans J, 1997. "Foreign Factor Ownership and Optimal Tariffs," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 1-19, February.
  4. de Melo, Jaime & Grether, Jean-Marie & Olarreaga, Marcelo, 1999. "Who Determines Mexican Trade Policy?," CEPR Discussion Papers 2176, C.E.P.R. Discussion Papers.
  5. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  6. Konishi, Hideo & Saggi, Kamal & Weber, Shlomo, 1999. "Endogenous trade policy under foreign direct investment," Journal of International Economics, Elsevier, vol. 49(2), pages 289-308, December.
  7. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
  8. Hillman, Arye L & Ursprung, Heinrich W, 1993. "Multinational Firms, Political Competition, and International Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 347-63, May.
  9. Ellingsen, Tore & Warneryd, Karl, 1999. "Foreign Direct Investment and the Political Economy of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 357-79, May.
  10. Marcelo Olarreaga, 1998. "Tariff Reductions under Foreign Factor Ownership," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 830-836, November.
  11. Hillman, Arye L. & Ursprung, Heinrich W., 1996. "The political economy of trade liberalization in the transition," European Economic Review, Elsevier, vol. 40(3-5), pages 783-794, April.
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Cited by:
  1. Emily Blanchard, 2006. "Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?," CESifo Working Paper Series 1735, CESifo Group Munich.
  2. Wang, Jue-Shyan & Koo, Hui-wen & Chen, Tain-Jy, 2006. "Resource rivalry and endogenous lobby," Japan and the World Economy, Elsevier, vol. 18(4), pages 488-511, December.
  3. Andreas Polk, 2002. "Lobbying Activities of Multinational Firms," Working Papers 0205, University of Zurich, Socioeconomic Institute, revised Jun 2002.

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