Direct Foreign Investment, Crowding Out, and Underemployment in the Dualistic Economy

Edward F Buffie

Oxford Economic Papers, 1993, vol. 45, issue 4, 639-67

Abstract: This paper analyzes the impact of foreign investment on underemployment and domestic capital accumulation in a two-sector dual economy model. Foreign investment in the high-wage manufacturing sector crowds out domestic capital on a greater than one-for-one basis and lowers the level of manufacturing sector employment in the long-run. By contrast, foreign investment in an enclave sector or in the primary export sector crowds in domestic capital and unambiguously reduces underemployment. Furthermore, under weak conditions, foreign investment in the enclave or primary export sector is unambiguously welfare improving viewed over the entire transition path. Copyright 1993 by Royal Economic Society.

Date: 1993
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