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

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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 set up a firm in a given country. Therefore, agents willing to set up a firm in a foreign country need to incur a learning cost that depends on how different is the foreign entrepreneurial environments from the domestic one. In this context, we show that globalization fosters FDI and raises wages, output and productivity. Moreover, it benefits workers and highly talented multinational entrepreneurs, while harming low-ability domestic producers. The effects of openness follow from highly efficient foreign entrepreneurs driving inefficient local firms out of the market. We provide empirical evidence consistent with the implications of the model, showing a significant negative effect of the distance between nationwide regulations indexes on bilateral FDI flows.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 184.

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Date of creation: 01 Oct 2007
Date of revision: 05 Oct 2009
Handle: RePEc:sef:csefwp:184

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Keywords: Multinational Firms; Heterogeneous Agents; Policy Harmonization;

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Cited by:
  1. Marco Pagano & Giovanni Pica, 2012. "Finance and employment," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 5-55, 01.
  2. Valkonen, Laura, 2006. "Deregulation as a Means to Increase Competition and Productivity," Discussion Papers 1014, The Research Institute of the Finnish Economy.
  3. 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.
  4. Busse, Matthias & Groizard Cardosa, José Luis, 2006. "FDI, Regulations and Growth," HWWA Discussion Papers 342, Hamburg Institute of International Economics (HWWA).
  5. Busse, Matthias & Groizard, Jose Luis, 2006. "Foreign direct investment, regulations, and growth," Policy Research Working Paper Series 3882, The World Bank.

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