Welfare Effects of FDI: A Quantitative Analysis

Balázs Zélity

No 2021-001, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: Foreign direct investment can increase productivity and wages. However, it is also often accompanied by primary income deficits as foreign-owned firms repatriate their profits. The welfare effects of FDI are thus ambiguous. A particularly illustrative example of this phenomenon are the Visegr´ad 4 (V4) countries (Czech Republic, Hungary, Poland, Slovakia). This paper investigates whether FDI can be beneficial in the presence of profit repatriation using a general equilibrium model calibrated to the V4 economies. Counterfactual simulations suggest that the benefits of FDI outweigh the costs for these countries. On average, a 1% increase in the number of foreign firms is associated with a 0.17% increase in welfare. However, incentivising foreign firms to reinvest more of their profits domestically is, ceteris paribus, welfare-improving. A 10-percentage-point increase in the profit repatriation rate is associated with a 1.06% welfare gain on average.

Keywords: foreign direct investment; primary income flows; profit repatriation (search for similar items in EconPapers)
JEL-codes: E60 F21 F23 F36 F40 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2021-01
New Economics Papers: this item is included in nep-cwa, nep-int and nep-tra
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Journal Article: The welfare effects of FDI: A quantitative analysis (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2021-001

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