درباره اثرات رفاهی سرمایه گذاری خارجی

Modern growth theory emphasizes endogenous technological change as the engine of growth. A policy implication for developing countries that has been drawn from this theory is that foreign direct investment increases growth. However, welfare assessments must recognize that investment returns may be repatriated. In this paper we show that foreign investment may decrease national welfare due to the transfer of capital returns to foreigners. Taking into account all the relevant effects, we show that welfare does not change monotonously with FDI and we characterize the conditions that imply a positive or a negative welfare effect of foreign investment.

Recent literature in growth theory points to research and innovation as the engine of growth. A policy implication for developing economies that has been drawn from this theory is that foreign investment increases growth through the access to better technologies. Romer (1993) emphasizes the point and advises developing countries to open their economies to foreign investment. Several empirical studies support the argument. Blomström et al. (1994), Balasubramanyam et al. (1996) and Borensztein et al. (1998) present evidence that inward direct investment has raised the growth rate of many developing countries. Also, the results obtained by Barrel and Pain (1997) and Borensztein et al. (1998) suggest that the transfer of technology is an important channel through which this happens. The strength of the empirical result that FDI increases growth may overshadow the fact that FDI does not necessarily increase welfare. This paper discusses the welfare effect of foreign direct investment, when foreign investors have lower costs of introducing new goods in the economy because they already know the technology.1 Specifically we address two, intrinsically linked, effects. First, the decrease in the innovation cost which increases the rate of growth. Second, the loss of investment returns to foreigners, as national investment becomes unprofitable. A final effect of foreign investment is the change in the cost of capital due to the access of foreign investors to the international capital market. Cardoso and Dornbusch (1989) summarize the traditional analysis of FDI in trade models. If capital is paid at its marginal product, a discrete inflow of capital increases national income, as the increase in output is larger than the returns to foreign capital. If some distortion implies that capital is paid more than its marginal product, foreign investment may imply a decrease in welfare.2 These results were obtained in a static environment. Investment meant more physical capital. When technological development is brought to the center of the analysis, the meaning of investment changes. If investment means better capital, or better technology, then ‘new investment’ may put away ‘old investment’. Thus, when innovation is the engine of growth, creative destruction effects must be taken into account. Feenstra (1996, Section 6.2) considers FDI by multinational firms in an environment similar to the one considered in this paper. However, he does not evaluate the welfare effect of FDI. He states that ‘the rapid decline in consumer prices suggests long-run welfare gains (…). The only qualification to this concerns the asset holding of consumers (…). This would have to be taken into account in the welfare analysis.’3 He considers that ‘it will be unprofitable to engage in any R&D’ in the home economy, so there is a ‘capital loss for shareholders’ in the home economy. Feenstra (1996) formalizes technological change as an increasing variety of goods. We use a rising product quality specification. The stronger creative destruction effect implied by this specification makes it more interesting for our study. In a closed economy creative destruction is a market failure that redistributes income between nationals. With foreign investment creative destruction may imply redistribution from nationals to foreigners decreasing national income. We distinguish two levels of creative destruction. The first one refers to the profits lost by the current producer because of the introduction of a better product in the market. The second one refers to all the profits the current producer would obtain by successively upgrading his product. These profits are lost when another producer crowds his product out of the market and makes it unprofitable for him to keep investing in this market. Our specification for FDI stresses this second level of creative destruction. We consider the case where the lower costs of foreign investors imply that domestic investment becomes unprofitable. Thus, our results are relevant for foreign investment that crowds-out domestic investment. With this type of creative destruction, foreign investment implies transfers of profits to foreigners. These include the profits nationals would obtain if they kept investing in the development of new goods but which now belong to foreigners, since they make the investment. This transfer of profits is the second effect of FDI mentioned above and will be crucial in the evaluation of the welfare effect of foreign investment. Section 2 presents the model. In Section 3 we study the effect of an increase in research productivity for a closed economy. We show that an immiserizing growth effect is a possibility.4 In Section 4 we study the effect of opening the economy to foreign investors. This is the main contribution of this paper. We show that foreign investment may decrease welfare, mainly due to the loss of investment returns. The entire analysis is carried out from the perspective of the home economy, which is assumed to be a small economy. It is assumed that there is no trade other than what is implied by foreign investment.

Foreign investors are able to introduce new goods in the economy at a lower cost than nationals. This implies that after the opening of the economy to foreign investors, domestic producers will no longer be able to act in the R&D sector. This has a negative effect on national income, which is translated into a loss of profits. We have shown that foreign investment may decrease national welfare due to the transfer of profits to foreigners, even when the increase in the rate of growth has a positive effect on welfare. Foreign investment increases welfare only if the increase in productivity is great enough to compensate for the loss of profits. The strength of the creative destruction effect increases with the degree of substitutability between the new ‘foreign’ product and the already produced ‘domestic’ products.19 Our results are relevant for foreign investment that crowds-out domestic investment. The policy relevance of the theoretical results depends on its quantitative importance. Thus, we have tried to measure the welfare effects of FDI. A few numerical results, presented in Appendix, suggest that there are small negative changes in welfare for a restricted range of values for the parameters.20 Many economies spend valuable resources to attract foreign investors. However, our research raises the possibility that there may be no welfare gains from opening the economy to foreign investment. Thus, more care should be given to welfare analysis before such resources are spent. Finally, it should be noted that this paper has studied the welfare effect of foreign investment for an unanticipated opening of the economy to foreign investment. If this opening were previously announced, domestic investors would expect a rise in the rate of innovation. Taking these expectations into account decreases the expected return from research. Thus, the announcement of the opening to foreign investment implies an additional effect that could be added to our study.