Advanced Search
MyIDEAS: Login to save this paper or follow this series

Foreign direct investment in services and the domestic market for expertise

Contents:

Author Info

  • Markusen, James
  • Rutherford, Thomas F.
  • Tarr, David

Abstract

A growing body of evidence suggests that the close availability of diverse business services is important for economic growth. Producer services such as managerial and engineering consulting can provide specialized knowledge to help domestic firms develop at lower unit cost. But these intermediate services are often nontraded, or costly to trade, which may be one reason that cities and industrial complexes form and economic performance differs across regions. Because services are costly to trade, foreign services are best transferred through foreign direct investment. This has important implications for public policy. Policies that affect foreign direct investment differ considerably from those that affect trade in goods. The authors develop a model of services, results from which show that: A) Liberalizing restraints on inward foreign direct investment has a powerful positive impact on the income and welfare of the importing country. The impact is much stronger than in traditional competitive models of trade in goods. B) Policies to protect domestic skilled labor against competition from imported services can have the perverse effect of lowering returns to domestic skilled labor-because while imported services economize on the use of domestic skilled labor (compared with domestic service industries), the positive effects on scale and productivity in the downstream industry can be powerful enough that the real wages of domestic skilled labor rise after the liberalization of foreign direct investment in service industries. In other words, domestic skilled labor and foreign direct investment are partial-equilibrium substitutes in the model but are typically general-equilibrium complements. C)The increase in the variety of imported services leads to increased total factor productivity in downstream industries, but the relative impact on downstream industries depends on how intensively they use intermediate services. The differential in effects on productivity in the production of final goods can be strong enough that permitting foreign direct investment can actually affect whether a good is exported rather than being imported. Policymakers should be aware that protection of a domestic service industry affects different constituencies differently. Although domestic capital owners may be adversely affected by foreign direct investment, domestic skilled workers in the industry are likely to see demand for their skills-and their real wages-rise. Moreover, downstream industries that use the service unambiguously benefit from foreign direct investment and their expansion can be surprisingly strong.

Download Info

If 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.
File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2000/09/01/000094946_00082205414672/Rendered/PDF/multi_page.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2413.

as in new window
Length:
Date of creation: 31 Aug 2000
Date of revision:
Handle: RePEc:wbk:wbrwps:2413

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Payment Systems&Infrastructure; Environmental Economics&Policies; Economic Theory&Research; Banks&Banking Reform; Health Economics&Finance; Environmental Economics&Policies; Economic Theory&Research; Health Economics&Finance; Banks&Banking Reform; Municipal Financial Management;

Other versions of this item:

References

References listed on IDEAS
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.:
as in new window
  1. Kravis, Irving B & Lipsey, Robert E, 1988. "National Price Levels and the Prices of Tradables and Nontradables," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 474-78, May.
  2. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  3. Matusz, Steven J. & Tarr, David, 1999. "Adjusting to trade policy reform," Policy Research Working Paper Series 2142, The World Bank.
  4. Antonio Ciccone & Robert E. Hall, 1995. "Productivity and the density of economic activity," Economics Working Papers 120, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Thomas J. Holmes, 1999. "Localization Of Industry And Vertical Disintegration," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 314-325, May.
  6. Rutherford, Thomas F, 1999. "Applied General Equilibrium Modeling with MPSGE as a GAMS Subsystem: An Overview of the Modeling Framework and Syntax," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 14(1-2), pages 1-46, October.
  7. 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.
  8. Francois, Joseph F, 1990. "Producer Services, Scale, and the Division of Labor," Oxford Economic Papers, Oxford University Press, vol. 42(4), pages 715-29, October.
  9. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262561476, December.
  10. Joseph F. Francois, 1990. "Trade in Producer Services and Returns Due to Specialization under Monopolistic Competition," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 23(1), pages 109-24, February.
  11. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  12. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, Elsevier, vol. 46(2), pages 183-203, December.
  13. Lopez-de-Silanes, Florencio & Markusen, James R. & Rutherford, Thomas F., 1994. "Complementarity and increasing returns in intermediate inputs," Journal of Development Economics, Elsevier, Elsevier, vol. 45(1), pages 101-119, October.
  14. Markusen, James R, 1989. "Trade in Producer Services and in Other Specialized Intermediate Inputs," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 85-95, March.
  15. Rutherford, Thomas F., 1995. "Extension of GAMS for complementarity problems arising in applied economic analysis," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(8), pages 1299-1324, November.
  16. Faini, Riccardo, 1984. "Increasing Returns, Non-Traded Inputs and Regional Development," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(374), pages 308-23, June.
  17. Markusen, James R., 1990. "Derationalizing tariffs with specialized intermediate inputs and differentiated final goods," Journal of International Economics, Elsevier, Elsevier, vol. 28(3-4), pages 375-383, May.
  18. Martin, W. & Winters, L.A., 1995. "The Uruguay Round and the Developing Countries," World Bank - Discussion Papers, World Bank 307, World Bank.
  19. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 389-405, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2413. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.