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Can Tariff-Jumping Foreign Investment Be Beneficial?

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  • Yingfeng Xu

    (Department of Economics, University of Alberta)

Abstract

Can tariff-jumping foreign investment be beneficial? It is well known that tariff-jumping foreign investment is costly. The tax paid by foreign firms may not be sufficient to offset that cost. We present a model that incorporates two additional benefits of foreign investment. Being more efficient, foreign firms generally pay higher wages than domestic firms and generate spillovers that enable domestic firms to become more efficient and competitive. Our analysis suggests that attracting foreign investment through import protection can improve welfare if the spillover effect is significant. However, once domestic firms have learnt their trade, developing economies should liberalize trade to reduce the distortion cost.

Suggested Citation

  • Yingfeng Xu, 2001. "Can Tariff-Jumping Foreign Investment Be Beneficial?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 161-177, June.
    • Handle: RePEc:jed:journl:v:26:y:2001:i:1:p:161-177
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    References listed on IDEAS

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    1. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    2. David J. Teece, 2008. "Technology Transfer By Multinational Firms: The Resource Cost Of Transferring Technological Know-How," World Scientific Book Chapters, in: The Transfer And Licensing Of Know-How And Intellectual Property Understanding the Multinational Enterprise in the Modern World, chapter 1, pages 1-22, World Scientific Publishing Co. Pte. Ltd..
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    5. Robert E. Lipsey & Robert C. Feenstra & Carl H. Hahn & George N. Hatsopoulos, 1999. "The Role of Foreign Direct Investment in International Capital Flows," NBER Chapters, in: International Capital Flows, pages 307-362, National Bureau of Economic Research, Inc.
    6. Steven Globerman, 1979. "Foreign Direct Investment and `Spillover' Efficiency Benefits in Canadian Manufacturing Industries," Canadian Journal of Economics, Canadian Economics Association, vol. 12(1), pages 42-56, February.
    7. Jones, Ronald W., 1984. "Protection and the harmful effects of endogenous capital flows," Economics Letters, Elsevier, vol. 15(3-4), pages 325-330.
    8. Neary, Peter & Ruane, Frances P, 1988. "International Capital Mobility, Shadow Prices, and the Cost of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 571-585, November.
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    Cited by:

    1. Yifei Sun & Ke Wen, 2007. "Country Relational Distance, Organizational Power and R&D Managers: Understanding Environmental Challenges for Foreign R&D in China," Asia Pacific Business Review, Taylor & Francis Journals, vol. 13(3), pages 425-449, July.

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