Can Tariff-Jumping Foreign Investment Be Beneficial?

Yingfeng Xu

Journal of Economic Development, 2001, vol. 26, issue 1, 161-177

Abstract: Can tariff-jumping foreign investment be beneficial? It is well known that tariff-jumping foreign investment is costly. The tax paid by foreign firms may not be sufficient to offset that cost. We present a model that incorporates two additional benefits of foreign investment. Being more efficient, foreign firms generally pay higher wages than domestic firms and generate spillovers that enable domestic firms to become more efficient and competitive. Our analysis suggests that attracting foreign investment through import protection can improve welfare if the spillover effect is significant. However, once domestic firms have learnt their trade, developing economies should liberalize trade to reduce the distortion cost.

Date: 2001
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