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Comment on «Macroeconomic Adjustment under Foreign Investment»

Published online by Cambridge University Press:  17 August 2016

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Very few issues can stir controversy and arouse passions as much as foreign investment (FI from now on) and Multinational Corporations (MNC’s). The literature on the subject is enormous. There are several grounds on which MNC’s are usually blamed: they are alleged to inhibit national entrepreneurship, discourage domestic saving, bring into the country inappropriate technology, reduce the amount of competition in the economy and worsen income distribution. There is of course considerable margin of disagreement on the single allegations and often the story being told runs precisely the opposite way. It is not always easy to compare different standpoints insofar as the previous arguments are sometimes difficult to formalize. While there are some noticeable exceptions in this respect (1), it remains true that formal models on the impact and the behaviour of MNC’s are indeed a relatively rare breed. As far as foreign investment is concerned, there is a considerable body of literature which has analysed the impact of FI mainly in the context of standard international trade models. It is perhaps useful to recall some of the main theoretical results. In a one-sector model with no distortions, an infinitesimal inflow of foreign capital will leave national welfare unchanged provided capital earns its marginal product. If we consider instead a finite inflow, this will raise domestic welfare insofar as the country will appropriate the surplus below the marginal productivity of capital schedule (2). As far as the two-sector neoclassical model of trade is concerned, foreign capital will have no effect at all unless it forces specialization on the economy. If however distortions are introduced, the results change dramatically. For instance, in a small tariff-imposing economy a capital inflow from abroad will, if profits are repatriated, reduce national welfare.

Type
Part Three: Foreign Investment and Factor Mobility
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1984 

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References

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