Capital Flow, Foreign Direct Investment and Home Market Effect
AbstractIn this paper, we investigate the dynamics of foreign direct investment (FDI) and examine the effects of FDI on the macroeconomic dynamics following a decline in labor endowment. In so doing, we introduce capital accumulation into Helpman, Melitz and Yeaple (2004)'s model and extend their model to a dynamic setting following Ghironi and Melitz (2005). Our main findings are as follows. First, we find that FDI stocks do not monotonically decrease toward the new steady state but rather initially increase and move away from the new steady state before reversing course and converging to it, reflecting the fact that a part of foreign assets is accumulated in the form of FDI. Second, we find that foreign portfolio investment (FPI) helps the funding of foreign multinational firms and encourages inward FDI by them. While the increase in inward FDI decreases the number of domestic firms by discouraging their entry, it increases the equilibrium relative wages, thus making the relationship between relative wages and the number of firms different from the conventional "home market effect.''
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 13-E-05.
Date of creation: Jun 2013
Date of revision:
Contact details of provider:
Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
Foreign Direct Investment (FDI); Capital Flows; Home Market Effect;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
This paper has been announced in the following NEP Reports:
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.:
- Chang-Tai Hsieh & Ralph Ossa, 2011. "A Global View of Productivity Growth in China," NBER Working Papers 16778, National Bureau of Economic Research, Inc.
- Markusen, James R. & Venables, Anthony J., 2000.
"The theory of endowment, intra-industry and multi-national trade,"
Journal of International Economics, Elsevier,
Elsevier, vol. 52(2), pages 209-234, December.
- James R. Markusen & Anthony J. Venables, 1996. "The Theory of Endowment, Intra-Industry, and Multinational Trade," NBER Working Papers 5529, National Bureau of Economic Research, Inc.
- Markusen, James R. & Venables, Anthony J., 1996. "The Theory of Endowment, Intra-Industry and Multinational Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1341, C.E.P.R. Discussion Papers.
- David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987.
"International real business cycles,"
Working Papers, Federal Reserve Bank of Minneapolis
426, Federal Reserve Bank of Minneapolis.
- Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(4), pages 745-75, August.
- Mark J. Melitz, 2002.
"The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,"
NBER Working Papers
8881, National Bureau of Economic Research, Inc.
- Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1695-1725, November.
- Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3381, C.E.P.R. Discussion Papers.
- Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, American Economic Association, vol. 87(4), pages 520-44, September.
- Chang-Tai Hsieh & Ralph Ossa, 2011. "A Global View of Productivity Growth in China," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd10-166, Institute of Economic Research, Hitotsubashi University.
- Natalia Ramondo & Andrés Rodríguez-Clare, 2010. "Growth, Size, and Openness: A Quantitative Approach," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 62-67, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken).
If references are entirely missing, you can add them using this form.