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Firm productivity, foreign direct investment and the host-country welfare: trade cost vs. cheap labor


  • Arijit Mukherjee

    () (University of Nottingham)


We show that the relationship between higher productivity of the foreign firm and host country welfare depends on the reason for foreign direct investment (FDI). If the reason for FDI is to get the advantage of cheap labor, higher productivity of the foreign firm may reduce host-country welfare. Higher productivity of the foreign firm always increases host-country welfare if the reason for FDI is to save transportation costs but may reduce it if trade costs consist of tariffs. Thus, the present paper complements the recent literature on international trade that explores the effects of foreign firms' productivities on the incentives for FDI.

Suggested Citation

  • Arijit Mukherjee, 2008. "Firm productivity, foreign direct investment and the host-country welfare: trade cost vs. cheap labor," Economics Bulletin, AccessEcon, vol. 6(23), pages 1-8.
  • Handle: RePEc:ebl:ecbull:eb-08f20001

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    References listed on IDEAS

    1. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    2. Kamal Saggi, 2002. "Trade, Foreign Direct Investment, and International Technology Transfer: A Survey," World Bank Research Observer, World Bank Group, vol. 17(2), pages 191-235, September.
    3. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
    4. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December.
    5. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Frank Dietrich & Hartmut Kliemt & Michael Imhoff, 2002. "Introduction," Homo Oeconomicus, Institute of SocioEconomics, vol. 19, pages 7-8.
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    More about this item


    Cheap labor Foreign direct investment Host-country welfare Trade cost;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F1 - International Economics - - Trade


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