Foreign Investment and Endogenous Protection with Protectionist Quid Pro Quo

Arye Hillman () and Heinrich Ursprung

Economics and Politics, 1999, vol. 11, issue 1, 1-12

Abstract: The literature on quid pro quo foreign direct investment describes how unwarranted investment may be undertaken because of the endogeneity of trade policy. The quid pro quo is that foreign producers, who are exporters to the host economy, invest in return for a liberal trade policy. We describe converse circumstances. The nexus between foreign investment and endogeneity of trade policy is implicit (not explicit as in quid pro quo investment), and a government with socially correct objectives (perhaps imposed by international‐agency conditionality) wishes (i) to privatize a domestic firm by sale to a foreign investor who can provide technology improvement for domestic production and (ii) to pursue a liberal trade policy. The government is electorally constrained by needs of political popularity. The outcome is that efficient private investments may not be undertaken—in contrast with the quid pro quo case where inefficient investments are undertaken. While our model is general, the conditions we describe appear to be in particular present in post‐socialist economies. Our model offers a contributing explanation for the slow pace of progress in many such economies, which rely on foreign technological transfer to improve the technology and product quality of post‐socialist industry, but fail to receive the requisite foreign investment despite governments' good intentions.

Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1111/1468-0343.00050

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:ecopol:v:11:y:1999:i:1:p:1-12

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0954-1985

Access Statistics for this article

Economics and Politics is currently edited by Peter Rosendorff

More articles in Economics and Politics from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().