The Costs of Inward Direct Foreign Investment to Developing Countries

17 Pages Posted: 5 Nov 2006

See all articles by Saziye Gazioglu

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School

W. David McCausland

University of Aberdeen - Business School

Date Written: February 2002

Abstract

In this paper we develop a two country general equilibrium extension of the Stockman (1980)-Lucas (1982) equilibrium exchange rate model. This optimising framework gives us the opportunity to analyse the effect of foreign direct investment on trade and welfare of both the investor and the recipient countries. We show that, contrary to conventional wisdom, it is likely that the recipient country will suffer a welfare loss, even though it may improve its trade balance, and despite it having a comparative advantage in production in the sector in which direct foreign investment takes place. Traditional analysts have tended to focus somewhat disproportionately on the effects of foreign direct investment on the trade balance, assuming that an improvement in the trade balance inevitably implied an improvement in welfare. The use of a properly micro-founded two-country model allows us to challenge this orthodoxy.

Keywords: foreign direct investment, welfare, trade, exchange rates

JEL Classification: F17, F21, F32, F34, F40

Suggested Citation

Gazioglu, Saziye and McCausland, W. David, The Costs of Inward Direct Foreign Investment to Developing Countries (February 2002). Available at SSRN: https://ssrn.com/abstract=942312 or http://dx.doi.org/10.2139/ssrn.942312

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
Aberdeen AB10 7QE
United Kingdom

W. David McCausland (Contact Author)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Old Aberdeen AB24 3QY, Scotland AB24 3QY
United Kingdom

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