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

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Author Info
Giovanni Pica () (Università di Salerno and CSEF)
José V. Rodríguez Mora () (University of Southampton,UPF, CREA, CEPR, CES-ifo and IZA)

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

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

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Related research
Keywords: Multinational Firms Heterogeneous Agents Policy Harmonization

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Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  21. repec:rus:hseeco:122439 is not listed on IDEAS
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