IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Foreign Direct Investment, Employment Volatility and Cyclical Dumping

Listed author(s):
  • Joshua Aizenman

This paper analyzes the impact of foreign direct investment (FDI) on the patterns of cyclical dumping (exporting at a price below marginal cost). We consider a global economy where manufacturing is monopolistic-competitive, and productivity is subject to country- specific shocks. Labor is risk averse and immobile across countries, and entrepreneurs are risk neutral. Labor employment and income is governed by implicit contracts, which offer stable real income and volatile employment. Capacity investment is irreversible, and is done prior to the resolution of uncertainty. If investment in manufacturing capacity is characterized by returns to scale, higher volatility of productivity shocks is shown to induce producers to diversify internationally by means of FDI. The resultant integrated equilibrium is characterized by greater volatility of employment, as the multinational effectively reallocates employment from a low- realized-productivity to a high-realized-productivity country. We derive a simple condition characterizing cyclical dumping -- it occurs when the percentage shortfall of the realized employment exceeds Lerner's ratio of market power (the inverse of the demand elasticity). Cyclical dumping is more frequent in more competitive and more labor- intensive industries. FDI is shown both to improve welfare, and to increase the incidences of cyclical dumping.

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:
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4683.

in new window

Date of creation: Mar 1994
Publication status: published as International Journal of Finance & Economics, Winter 1996, vol. 10: 1-28.
Handle: RePEc:nbr:nberwo:4683
Note: ITI
Contact details of provider: Postal:
National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

Phone: 617-868-3900
Web page:

More information through EDIRC

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.:

in new window

  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. Steven J. Matusz, 1985. "The Heckscher-Ohlin-Samuelson Model with Implicit Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1313-1329.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4683. 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: ()

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.