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Controlled Openness and Foreign Direct Investment

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  • Joshua Aizenman
  • Sang-Seung Yi

Abstract

The purpose of this paper is to offer an explanation of why a developing country may adopt a partial reform under which foreign direct investments are controlled. We consider a country where the ruling elite [referred to as State capital] prevents the entry of Foreign capital and taxes the private sector before reform. The impetus to reform comes from an improved productivity of Foreign capital. The reform diminishes State capital's ability to tax the private sector but allows it to extract payment from Foreign capital for access to its markets. We show that a higher productivity of Foreign capital always increases the attractiveness of a partial reform under which State capital can control the inflow of Foreign capital. In contrast, a higher productivity of Foreign capital can reduce the attractiveness of a full reform under which the entry of Foreign capital is unregulated. Our analysis implies that, under the circumstances where the impetus to reform comes from improvements in Foreign productivity, State capital's exercise of control over Foreign capital's inflow may be a necessary condition for the reform to take place at all. In the absence of such a control, State capital may be reluctant to carry out the efficiency-enhancing reforms."

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6123.

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Date of creation: Aug 1997
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Publication status: published as Review of Development Economics, Vol. 2, no. 1 (1998): 1-10.
Handle: RePEc:nbr:nberwo:6123

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  1. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  2. Romer, Paul, 1994. "New goods, old theory, and the welfare costs of trade restrictions," Journal of Development Economics, Elsevier, vol. 43(1), pages 5-38, February.
  3. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  4. Jefferson, Gary H & Rawski, Thomas G & Yuxin, Zheng, 1992. "Growth, Efficiency, and Convergence in China's State and Collective Industry," Economic Development and Cultural Change, University of Chicago Press, vol. 40(2), pages 239-66, January.
  5. Dani Rodrik, 1992. "The Rush to Free Trade in the Developing World: Why So Late? Why Now? Will it Last?," NBER Working Papers 3947, National Bureau of Economic Research, Inc.
  6. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  7. Feldman, David H & Gang, Ira N, 1996. "Revenue Motives and Trade Liberalization," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 276-81, October.
  8. Gelb, Alan & Jefferson, Gary & Singh, Inderjit, 1993. "Can Communist economies transform incrementally? China's experience," Policy Research Working Paper Series 1189, The World Bank.
  9. Shang-Jin Wei, 1997. "Gradualism versus Big Bang: Speed and Sustainability of Reforms," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1234-47, November.
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Cited by:
  1. Ramin Dadasov & Philipp Harms & Oliver Lorz, 2013. "Financial integration in autocracies: Greasing the wheel or more to steal?," Economics of Governance, Springer, vol. 14(1), pages 1-22, February.
  2. Desmet, Klaus & Rojas, Juan A, 2004. "Foreign Direct Investment and Spillovers: Gradualism May Be Better," CEPR Discussion Papers 4660, C.E.P.R. Discussion Papers.

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