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Direct Foreign Investment, Crowding Out, and Underemployment in the Dualistic Economy

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  • Buffie, Edward F

Abstract

This paper analyzes the impact of foreign investment on underemployment and domestic capital accumulation in a two-sector dual economy model. Foreign investment in the high-wage manufacturing sector crowds out domestic capital on a greater than one-for-one basis and lowers the level of manufacturing sector employment in the long-run. By contrast, foreign investment in an enclave sector or in the primary export sector crowds in domestic capital and unambiguously reduces underemployment. Furthermore, under weak conditions, foreign investment in the enclave or primary export sector is unambiguously welfare improving viewed over the entire transition path. Copyright 1993 by Royal Economic Society.

Suggested Citation

  • Buffie, Edward F, 1993. "Direct Foreign Investment, Crowding Out, and Underemployment in the Dualistic Economy," Oxford Economic Papers, Oxford University Press, vol. 45(4), pages 639-667, October.
  • Handle: RePEc:oup:oxecpp:v:45:y:1993:i:4:p:639-67
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    Cited by:

    1. Kwasi Boakye – Gyasi & Yao Li, 2015. "The Impact of Chinese FDI on Employment Generation in the Building and Construction Sector of Ghana," Eurasian Journal of Social Sciences, Eurasian Publications, vol. 3(2), pages 1-15.
    2. Haddad Eduardo Amaral & Giuberti Ana Carolina, 2014. "Economic impacts of natural resources on a regional economy: the case of the pre-salt oil discoveries in Espirito Santo, Brazil," Экономика региона, CyberLeninka;Федеральное государственное бюджетное учреждение науки «Институт экономики Уральского отделения Российской академии наук», issue 1, pages 111-124.
    3. Aizenman, Joshua, 2005. "Opposition to FDI and financial shocks," Journal of Development Economics, Elsevier, vol. 77(2), pages 467-476, August.
    4. Joshua Aizenman, 1999. "Capital Controls and Financial Crises," NBER Working Papers 7398, National Bureau of Economic Research, Inc.
    5. Jansen, Karel, 1995. "The macroeconomic effects of direct foreign investment: The case of Thailand," World Development, Elsevier, vol. 23(2), pages 193-210, February.
    6. Muhammad Tariq Majeed & Eatzaz Ahmad, 2007. "FDI and Exports in Developing Countries: Theory and Evidence," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 735-750.

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