This paper analyzes the optimal capital accumulation of a small open economy by incorporating the impact of technology transfer that accompanies foriegn ivestment. Assuming that technology transfer depends on the extent of foreign ownership, it is shown that, whenever there is technology transfer through foreign participation, the optimal rule suggests that a host country maintain some foreign capital in the steady state. The concept of the foreign capital impact function is introduced to capture possible negative effects in addition to the positive effects of foreign investment. The impact of foreign investment is shown to involve an externality, calling for government intervention for a social optimum. [110]
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