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Foreign Investment with Endogenous Protection

Author

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  • Gene Grossman
  • Elhanan Helpman

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

  • Gene Grossman & Elhanan Helpman, 1994. "Foreign Investment with Endogenous Protection," NBER Working Papers 4876, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4876
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    References listed on IDEAS

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    1. Bhagwati, Jagdish N. & Brecher, Richard A. & Dinopoulos, Elias & Srinivasan, T. N., 1987. "Quid pro quo foreign investment and welfare : A political-economy-theoretic model," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 127-138, October.
    2. B. Douglas Bernheim & Michael D. Whinston, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 1-31.
    3. Hillman, Arye L & Ursprung, Heinrich W, 1993. "Multinational Firms, Political Competition, and International Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 347-363, May.
    4. Elias Dinopoulos, 1992. "Quid Pro Quo Foreign Investment And Vers: A Nash Bargaining Approach," Economics and Politics, Wiley Blackwell, vol. 4(1), pages 43-60, March.
    5. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Koen Deconinck & Johan Swinnen, 2014. "The Political Economy of Geographical Indications," LICOS Discussion Papers 35814, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    2. Laixun Zhao, 1996. "The Complementarity Between Endogenous Protection And Direct Foreign Investment," Economics and Politics, Wiley Blackwell, vol. 8(1), pages 61-72, March.
    3. Glawe, Linda & Wagner, Helmut, 2016. "China in the Middle-Income Trap?," MPRA Paper 73336, University Library of Munich, Germany.
    4. Lainez, Christopher & Matschke, Xenia & Yotov, Yoto, 2016. "Policy and Politics: Trade Adjustment Assistance in the Crossfire," School of Economics Working Paper Series 2016-5, LeBow College of Business, Drexel University.
    5. Grether, Jean-Marie & de Melo, Jaime & Olarreaga, Marcelo, 2001. "Who determines Mexican trade policy?," Journal of Development Economics, Elsevier, vol. 64(2), pages 343-370, April.
    6. Maskin, Eric & Tirole, Jean, 2008. "Public-private partnerships and government spending limits," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 412-420, March.
    7. Bruce A. Blonigen & Robert C. Feenstra, 1997. "Protectionist Threats and Foreign Direct Investment," NBER Chapters,in: The Effects of U.S. Trade Protection and Promotion Policies, pages 55-80 National Bureau of Economic Research, Inc.
    8. Theodore To, 1999. "Dynamics and Discriminatory Import Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 1057-1068, August.
    9. Andrey Stoyanov, 2016. "Regional Trade Agreements and Cross-border Lobbying: Empirical Evidence from the Canada–US Free Trade Agreement Negotiations," Review of International Economics, Wiley Blackwell, vol. 24(1), pages 126-149, February.
    10. Branstetter, Lee G. & Feenstra, Robert C., 2002. "Trade and foreign direct investment in China: a political economy approach," Journal of International Economics, Elsevier, vol. 58(2), pages 335-358, December.
    11. Fabrice Defever & José-Daniel Reyes & Alejandro Riaño & Gonzalo Varela, 2017. "All These Worlds Are Yours, Except India: The Effectiveness of Export Subsidies in Nepal," CESifo Working Paper Series 6418, CESifo Group Munich.
    12. Blonigen, Bruce A. & Ohno, Yuka, 1998. "Endogenous protection, foreign direct investment and protection-building trade," Journal of International Economics, Elsevier, vol. 46(2), pages 205-227, December.
    13. Lucian A. Bebchuk & Zvika Neeman, 2010. "Investor Protection and Interest Group Politics," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1089-1119, March.
    14. Andréa M. Maechler, 2000. "The Politics of Trade Liberalization in the Presence of FDI Incentives," Working Papers 00.09, Swiss National Bank, Study Center Gerzensee.
    15. Claire H. Hollweg & Daniel Lederman & Devashish Mitra, 2016. "Structural Reforms and Labour-market Outcomes: International Panel-data Evidence," The World Economy, Wiley Blackwell, vol. 39(7), pages 925-963, July.
    16. Macher Jeffrey T & Mayo John W & Schiffer Mirjam, 2011. "The Influence of Firms on Government," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-27, January.
    17. Chakrabarti, Avik, 2003. "A theory of the spatial distribution of foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 149-169.
    18. Kamal Saggi & Halis Murat Yildiz & Andrey Stoyanov, 2015. "Do free trade agreements affect tariffs of non-member countries? A theoretical and empirical investigation," Vanderbilt University Department of Economics Working Papers 15-00010, Vanderbilt University Department of Economics.
    19. Blanchard, Emily J., 2010. "Reevaluating the role of trade agreements: Does investment globalization make the WTO obsolete?," Journal of International Economics, Elsevier, vol. 82(1), pages 63-72, September.
    20. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo Group Munich.
    21. MUKUNOKI Hiroshi, 2017. "Does Trade Liberalization Promote Antidumping Protection? A theoretical analysis," Discussion papers 17031, Research Institute of Economy, Trade and Industry (RIETI).
    22. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    23. Hamid Beladi & Sugata Marjit & Avik Chakrabarti, 2006. "Tariff Jumping and Joint Ventures," Working Papers 0002, College of Business, University of Texas at San Antonio.

    More about this item

    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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