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Sector-specific foreign direct investment, factor market distortions and non-immiserising growth

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  • Mukherjee, Soumyatanu

Abstract

This paper explores a 3×3 full-employment H-O-S model with tariff-protection in the capital-intensive import-competing sector and inflows of FDI (foreign direct investment) to an export sector (using foreign capital as a specific input) within the ‘foreign enclave’ of a small open developing economy; whereas there are labour market distortion in the domestic organised tariff-protected import-competing sector and capital market distortion in the domestic unorganised sector of this typical economy. I have considered implications of sector-specific foreign capital inflows on national income (or social welfare, crudely however) of the economy under two different scenarios: when entire income from foreign capital is fully repatriated back to the source country; and when supply of FDI is a positive function of net return to foreign capital in the recipient country, coupled with labour-augmenting type technology transfer. It is found that the possibility of non-immiserising growth improves in the presence of labour market distortion in the organised sector while credit market imperfection in the unorganised sector deteriorates it. However in the presence of technology transfer, existence of labour market distortion is no longer a necessary condition for obtaining such result due to foreign capital inflows to the foreign enclave of this small open developing economy. Existence of output-generated increasing returns in the sector within the foreign enclave will not alter our results; while under the second scenario it will enhance the possibility of non-immiserising growth by raising the tax-revenue from foreign capital income in the host country through increasing the rental to foreign capital. These results are counter-intuitive with respect to the existing theoretical results suggesting immiserising growth owing to sector-specific foreign capital inflows using 3×3 or 2×3 full-employment models without any linkages.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52214.

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Date of creation: 14 Dec 2013
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Handle: RePEc:pra:mprapa:52214

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Keywords: Sector-specific FDI; Foreign Enclave; General Equilibrium; Labour Market Distortion; Technology Transfer.;

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  1. Hamid Beladi & Sugata Marjit, 1992. "Foreign Capital and Protectionism," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 233-38, February.
  2. Koizumi, Tetsunori & Kopecky, Kenneth J., 1980. "Foreign direct investment, technology transfer and domestic employment effects," Journal of International Economics, Elsevier, vol. 10(1), pages 1-20, February.
  3. Sarbajit Chaudhuri, 2001. "Foreign Capital Inflow, Technology Transfer, and National Income," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(1), pages 49-56.
  4. Timothy Besley & Robin Burgess, 2002. "Can Labour Regulation Hinder Economic Performance? Evidence from India," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Yabuuchi, Shigemi, 2000. "Export Processing Zones, Backward Linkages, and Variable Returns to Scale," Review of Development Economics, Wiley Blackwell, vol. 4(3), pages 268-78, October.
  6. Sarbajit Chaudhuri, 2003. "How and how far to liberalize a developing economy with informal sector and factor market distortions," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 12(4), pages 403-428.
  7. Hamada, Koichi, 1974. "An economic analysis of the duty-free zone," Journal of International Economics, Elsevier, vol. 4(3), pages 225-241, August.
  8. Findlay, Ronald, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, MIT Press, vol. 92(1), pages 1-16, February.
  9. Sarbajit Chaudhuri, 2005. "Labour Market Distortion, Technology Transfer And Gainful Effects Of Foreign Capital," Manchester School, University of Manchester, vol. 73(2), pages 214-227, 03.
  10. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2009. "Revisiting the Informal Sector: A General Equilibrium Approach," MPRA Paper 52135, University Library of Munich, Germany.
  11. Mukherjee, Soumyatanu, 2011. "Revisiting the Apparent Paradox: Foreign Capital Inflow, Welfare Amelioration and ‘Jobless Growth’ with Agricultural Dualism and Non-traded Intermediate Input," MPRA Paper 33410, University Library of Munich, Germany.
  12. Hamilton, Carl & E.O. Svensson, Lars, 1982. "On the welfare effects of a duty-free zone," Journal of International Economics, Elsevier, vol. 13(1-2), pages 45-64, August.
  13. Koizumi, Tetsunori & Kopecky, Kenneth J., 1977. "Economic growth, capital movements and the international transfer of technical knowledge," Journal of International Economics, Elsevier, vol. 7(1), pages 45-65, February.
  14. Din, Musleh-ud, 1994. "Export processing zones and backward linkages," Journal of Development Economics, Elsevier, vol. 43(2), pages 369-385, April.
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