Foreign Direct Investment, Production, and Welfare

Alkis Otto

No 11/2003, Working Paper from Helmut Schmidt University, Hamburg

Abstract: We study the impact of foreign direct investment using a macroeconomic two-sector model of the small open economy with flexible exchange rates and perfect capital mobility. The focus is on horizontal greenfield investment and its effects on production, exchange rates, exports, imports, and welfare. In the host country, FDI harms the established industries. Despite this incoming FDI increases welfare. In the home country, FDI lowers domestic output of the established industries, too, and decreases welfare.

Keywords: Foreign Direct Investment; small open economy; welfare effects (search for similar items in EconPapers)
JEL-codes: F21 F41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2003-06-25
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