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The welfare effects of FDI: A quantitative analysis

Balázs Zélity

Journal of Comparative Economics, 2022, vol. 50, issue 1, 293-320

Abstract: 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)
Date: 2022
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DOI: 10.1016/j.jce.2021.09.007

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