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An Analysis of Changes in Wealth Distribution upon the Entrance of Foreign Direct Investment Firms

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  • Duong, Tran Lam Anh
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    Abstract

    This 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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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25899/1/070econDP13-09.pdf
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    Bibliographic Info

    Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2013-09.

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    Length: 19 p.
    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:hit:econdp:2013-09

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    Keywords: foreign direct investment; wealth distribution; entry and exit of entrepreneurs;

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    1. Mary Hallward-Driemeier & Giuseppe Iarossi & Kenneth L. Sokoloff, 2002. "Exports and Manufacturing Productivity in East Asia: A Comparative Analysis with Firm-Level Data," NBER Working Papers 8894, National Bureau of Economic Research, Inc.
    2. Changkyu Choi, 2006. "Does foreign direct investment affect domestic income inequality?," Applied Economics Letters, Taylor & Francis Journals, vol. 13(12), pages 811-814.
    3. Emmanuel Amissah & Spiros Bougheas & Rod Falvey, 2011. "Financial Constraints, the Distribution of Wealth and International Trade," The World Economy, Wiley Blackwell, vol. 34, pages 707-724, 05.
    4. Basu, Parantap & Guariglia, Alessandra, 2007. "Foreign Direct Investment, inequality, and growth," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 824-839, December.
    5. Thomas Gall & Marc Schiffbauer & Julia Kubny, 2009. "Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-188, Boston University - Department of Economics.
    6. Kiminori Matsuyama, 2011. "Imperfect Credit Markets, Household Wealth Distribution, and Development," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 339-362, 09.
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