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Foreign Investment with Endogenous Protection

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  • Grossman, Gene M.
  • Helpman, Elhanan

Abstract

Jagdish Bhagwati coined the phrase quid pro quo foreign investment to describe international investments made in anticipation of host country trade policy and perhaps with the intention of defusing a protectionist threat. We apply Bhagwati's notion to situations where (i) foreign investment is best described as the (uncoordinated) opening of branch plants by multinational corporations, and (ii) protection is a political response by an incumbent government to offers of policy-contingent campaign-contributions by domestic firms. We examine the determinants of anticipatory foreign investment and study some of its welfare implications. We also allow for lobbying by workers with sector-specific skills and show how the conflicting interests of these workers and the industrialists are resolved in determining policy toward foreign investment.

Suggested Citation

  • Grossman, Gene M. & Helpman, Elhanan, 1994. "Foreign Investment with Endogenous Protection," Foerder Institute for Economic Research Working Papers 275594, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275594
    DOI: 10.22004/ag.econ.275594
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    References listed on IDEAS

    as
    1. Elias Dinopoulos, 1989. "Quid Pro Quo Foreign Investment," Economics and Politics, Wiley Blackwell, vol. 1(2), pages 145-160, July.
    2. Ignatius J. Horstmann & James R. Markusen, 2021. "Endogenous market structures in international trade (natura facit saltum)," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 2, pages 25-45, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    Financial Economics; International Development;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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