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Firm productivity, foreign direct investment and the host-country welfare: trade cost vs. cheap labor

Author

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  • Arijit Mukherjee

    (University of Nottingham)

Abstract

We show that the relationship between higher productivity of the foreign firm and host country welfare depends on the reason for foreign direct investment (FDI). If the reason for FDI is to get the advantage of cheap labor, higher productivity of the foreign firm may reduce host-country welfare. Higher productivity of the foreign firm always increases host-country welfare if the reason for FDI is to save transportation costs but may reduce it if trade costs consist of tariffs. Thus, the present paper complements the recent literature on international trade that explores the effects of foreign firms' productivities on the incentives for FDI.

Suggested Citation

  • Arijit Mukherjee, 2008. "Firm productivity, foreign direct investment and the host-country welfare: trade cost vs. cheap labor," Economics Bulletin, AccessEcon, vol. 6(23), pages 1-8.
    • Handle: RePEc:ebl:ecbull:eb-08f20001
    as

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    File URL: http://www.accessecon.com/pubs/EB/2008/Volume6/EB-08F20001A.pdf
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    References listed on IDEAS

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    1. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    2. Arijit Mukherjee, 2007. "Firm heterogeneity, foreign direct investment and the host-country welfare: Trade costs vs. cheap labor," Discussion Papers 07/05, University of Nottingham, School of Economics.
    3. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
    4. James R. MARKUSEN, 2021. "Trade And The Gains From Trade With Imperfect Competition," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 14, pages 303-323, World Scientific Publishing Co. Pte. Ltd..
    5. Kamal Saggi, 2002. "Trade, Foreign Direct Investment, and International Technology Transfer: A Survey," The World Bank Research Observer, World Bank, vol. 17(2), pages 191-235, September.
    6. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December.
    7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    Cited by:

    1. Leitão, Nuno Carlos, 2012. "Foreign direct investment and globalization," MPRA Paper 37436, University Library of Munich, Germany.

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    More about this item

    Keywords

    Cheap labor Foreign direct investment Host-country welfare Trade cost;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F1 - International Economics - - Trade

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