An Analysis of Changes in Wealth Distribution upon the Entrance of Foreign Direct Investment Firms
AbstractThis paper investigates the role of foreign direct investment (FDI) firms with respect to various economic aspects in developing countries, such as the determination of wealth distribution and the entry and exit of entrepreneurs. The model used in this paper is based on the theoretical framework developed in Matsuyama (2011). Unlike the original model focusing on a closed economy, this paper will introduce the arrival of FDI firms as a new actual foreign factor. It is shown that the FDI firms can possibly have various negative effects. More specifically, the following somewhat interesting results are obtained. First, the paper is the first to describe how the entrance of FDI firms can effect both wealth equality and inequality. This entrance can cause equality by acting as either a "big push" to push all the poorer members of society out of the poverty trap so that all domestic agents may become more equal with respect to wealth distribution and more free with respect to job selection. Conversely, it could lead to an "underdevelopment trap" whereby all domestic agents have no other choice than to work for FDI firms. On the other hand, the entrance of FDI firms may also cause inequality by widening the gap between rich and poor. The cost of starting a new business, the bequest motive and the world interest rate play critical roles in the determination of the effects of FDI-firm entry. Second, entry and exit of entrepreneurs is also analyzed under profitability and borrowing constraints and its relation to equality is also discussed.
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Bibliographic InfoPaper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2013-09.
Length: 19 p.
Date of creation: Sep 2013
Date of revision:
foreign direct investment; wealth distribution; entry and exit of entrepreneurs;
Find related papers by JEL classification:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-02 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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