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Can a home country benefit from FDI? A theoretical analysis

  • Chang, Chia-Ying

The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2067
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Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2067.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwecf:2067
Contact details of provider: Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
Web page: http://www.victoria.ac.nz/sef
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  1. Bruno Van Pottelsberghe & Frank Lichtenberg, 2001. "Does foreign direct investment transfer technology across borders?," ULB Institutional Repository 2013/6221, ULB -- Universite Libre de Bruxelles.
  2. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
  3. Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
  4. Magnus Blomstrom & Ari Kokko, 2003. "The Economics of Foreign Direct Investment Incentives," NBER Working Papers 9489, National Bureau of Economic Research, Inc.
  5. Riess, Armin & Uppenberg, Kristian, 2004. "The internationalisation of production: moving plants, products, and people," EIB Papers 1/2004, European Investment Bank, Economics Department.
  6. Magnus Blomstrom & Ari Kokko, 1994. "Home Country Effects of Foreign Direct Investment: Evidence from Sweden," NBER Working Papers 4639, National Bureau of Economic Research, Inc.
  7. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598, June.
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