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Who's Afraid of a Globalized World? Foreign Direct Investments, Local Knowledge and Allocation of Talents

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  • Giovanni Pica
  • José V. Rodriguez Mora

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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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 404.

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Date of creation: 2011
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Handle: RePEc:igi:igierp:404

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Cited by:
  1. Giovanni Pica & José V. Rodriguez Mora, 2011. "Who's Afraid of a Globalized World? Foreign Direct Investments, Local Knowledge and Allocation of Talents," Working Papers 404, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Marco Pagano & Giovanni Pica, 2012. "Finance and employment," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 5-55, 01.
  3. Busse, Matthias & Groizard Cardosa, José Luis, 2006. "FDI, Regulations and Growth," HWWA Discussion Papers 342, Hamburg Institute of International Economics (HWWA).
  4. Busse, Matthias & Groizard, Jose Luis, 2006. "Foreign direct investment, regulations, and growth," Policy Research Working Paper Series 3882, The World Bank.
  5. Valkonen, Laura, 2006. "Deregulation as a Means to Increase Competition and Productivity," Discussion Papers 1014, The Research Institute of the Finnish Economy.

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