The welfare effects of FDI: A quantitative analysis
Journal of Comparative Economics, 2022, vol. 50, issue 1, 293-320
Foreign direct investment (FDI) 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 Visegrád 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 share 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; East-Central Europe (search for similar items in EconPapers)
JEL-codes: F21 F23 F41 O24 (search for similar items in EconPapers)
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Working Paper: Welfare Effects of FDI: A Quantitative Analysis (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:50:y:2022:i:1:p:293-320
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