سرمایه گذاری خارجی بخش خاص، جریان کار، مقیاس اقتصاد و رفاه

This paper argues that the impact of foreign investment on welfare depends on the sector that attracts the investment and certain characteristics of the economy. It is shown that, as long as the intermediate good is non-traded, foreign investment in a sector that is subject to economies of scale increases welfare by increasing the size of the intermediate good sector. On the other hand, foreign investment in a sector that is subject to constant returns to scale decreases welfare by decreasing the size of the intermediate good sector. The impact of foreign investment (in either sector) on welfare depends on relative factor intensities when the intermediate good is traded.

Generally speaking, foreign investment is viewed as a powerful engine of economic growth, particularly in developing countries where the supply of domestic capital is inadequate. Improvement in communication technology and a relatively peaceful international environment have contributed towards a significant increase in foreign investment since the mid-1980s. The economic growth experiences of some Asian economies notably Hong Kong, Singapore, South Korea and Taiwan have been closely linked to their ability to attract significant foreign investment. It is widely believed that, in addition to facilitating technology and skills transfer, foreign investment creates jobs. Fig. 1 shows that, in recent years, less developed countries are attracting a larger proportion of foreign investment at the expense of the developed countries.1 The cost and benefit of foreign investment to host countries have been an issue of intense debate for a long period of time (for example see Meyer, 2003). While foreign investment is generally regarded as good for host countries, the empirical evidence is mixed. Indeed some studies have shown that foreign investment can have a negative effect on host countries through increased competition and a decline in productivity.2 The theoretical literature that assumes perfect competition and constant returns to scale in all sector of the economy suggests that a small inflow of either capital or labour has no effect on welfare. Since the seminal work of Dixit and Stiglitz (1977), a number of studies have incorporated aspects of monopolistic competition in international trade models. This has resulted in re-examination and in some cases extension of a number of existing results. Markusen (1989) has shown that, in the presence of monopolistic competition, actual output level is below the socially desirable level. In other words, monopolistic competition leads to under production. This implies that, in the presence of monopolistic competition, the level of foreign investment in a country is also likely to be below the socially desired level. It is therefore desirable to develop policies that increase the level of foreign investment. By making use of a simple model where a small open economy produces one final good and non-traded producer services, Rivera-Batiz and Rivera-Batiz (1991) have shown that in the presence of monopolistic competition in services sector, a small inflow of capital can increase welfare whereas labour inflow has no effect on welfare. Wong (1995) has argued that in the presence of monopolistic competition unrestricted international factor mobility may not lead to factor price equalisation. Wong has also argued that in the presence of monopolistic competition in the production of final goods, inflow of one factor can lead to an increase in the reward of all factors. Rodrik (1996) has shown that the presence of monopolistic competition can gives rise to a situation where a high skill but low physical capital abundant country may be stuck in producing low-tech commodities accompanied by low wages. Rodrik argues that this situation requires government intervention. Rodriguez-Clare (1996) uses a model to argue that in the presence of monopolistic competition, an economy may be stuck in an equilibrium that involves production of labour intensive products and where returns to both labour and capital are low. This situation is likely to result in little or no foreign investment and domestic capital accumulation and the economy will be stuck in an underdevelopment trap. Government intervention would therefore be highly desirable. Barrios et al. (2005) have shown that due to positive externalities, foreign direct investment can increase GDP. In a recent multi-country study, Lejour et al. (2008) have empirically estimated the effect of foreign direct investment in services sector on GDP growth. This paper attempts to extend the existing literature by re-examining the impact of foreign investment on welfare. Since the pioneering work of Neary (1978), a number of studies have utilised sector specific models to re-examine international trade and development policy issues. However, none of the available studies have considered the welfare impact of sector specific foreign investment in the presence of monopolistic competition. Foreign investment increases the supply of capital in the domestic market and it is well known that different types of capital are not perfect substitutes.3 The results presented in this paper are based on an extension of Rivera-Batiz and Rivera-Batiz (1991) model. This extension is useful because it allows one to provide a theoretical foundation for the mixed evidence provided by empirical studies. The paper argues that the effect of foreign investment on welfare depends on the sector that attracts this investment and certain characteristics of the economy. These characteristics include whether or not economies of scale are present in the economy and whether or not the intermediate goods are traded. This paper shows that, depending on relative factor intensities, foreign investment can lead to a decrease in welfare when the intermediate good is traded. While the focus of this paper is on the effect of foreign investment on welfare, the framework can also be used to examine the impact of labour inflow on welfare. The rest of this paper is organised as follows. A simple general equilibrium model of a small open-economy is developed in section two. The impact of foreign investment and labour inflow on welfare is examined in section three whereas the last section offers some concluding remarks.

Rapid economic development, as measured by national income, experienced by a number of Asian economies (such as Hong Kong, Singapore, South Korea and Taiwan) is often linked to their ability to attract significant foreign investment. Rising standard of living experienced by China and India in recent years also appears to coincide with increased foreign investment in both countries. Is larger foreign investment always good? Empirical studies have provided mixed evidence. This paper aims to provide a theoretical foundation for the mixed evidence. The existing theoretical studies, based on the assumption of constant returns to scale and perfect competition in all sectors, argue that a small inflow of primary factors (i.e., capital and labour) has no effect on welfare of a small open economy. Rivera-Batiz and Rivera-Batiz (1991) were among the first to argue that an inflow of capital can increase welfare in the presence of external economies. This paper extends Rivera-Batiz and Rivera-Batiz model. Specifically, this paper (i) utilises a model where a small open economy produces two-final goods and (ii) considers two cases: one where output of an intermediate good is internationally traded and the other where output of the intermediate good is non-traded, and (iii) considers the impact of two types of foreign investment and labour inflow on national welfare. This paper argues that the impact of foreign investment on welfare depends on the sector where the investment takes place and certain characteristics of the economy. It is shown that irrespective of whether or not the intermediate good is traded, welfare as measured by net income of the residents is closely linked to expansion of the intermediate good sector. It is shown that, irrespective of relative factor intensities, foreign investment in the sector where economies of scale are present increases welfare through increasing the size of the intermediate good sector. However, foreign investment in the sector that is subject to constant returns to scale decreases welfare. Because of the presence of economies of scale in one sector of the economy, inflow of labour increases welfare. These results are based on the assumption that output of the intermediate good sector is non-traded. On the other hand, relative factor intensities play a crucial role when output of the intermediate good is traded. It is shown that foreign investment in either sector decreases national welfare when the intermediate good is traded and its production is relatively labour intensive. Labour inflow increases national welfare as long as the intermediate good sector is relatively labour intensive. In both cases (i.e., when the intermediate good is traded and when it is non -traded), national welfare increases due to an increase in the size of the intermediate good sector.