Social Benefits and Losses from FDI
Social Benefits and Losses from FDI
Two Nontraditional Views
This chapter raises some questions about the relative superiority of foreign direct investment (FDI). It takes two views of FDI. The first view of FDI focuses on their effects on technology transfer and promotion of competition. These effects are in addition to the traditional gains from trade afforded by FDI, i.e., the blending of foreign savings with domestic savings to finance domestic investment. The second view of FDI focuses on perverse interactions between FDI and the domestic capital market, which implies that FDI flows may bring losses to the host country. This interaction is modeled in an asymmetric information framework. The chapter is organized as follows. It starts with an analysis of the second view in Section 9.2, followed by a parallel analysis of the first view in Section 9.3. Numerical simulations are used to assess the possible welfare gains/losses these two nontraditional aspects of FDI may bring to the host country relative to the traditional gains. Section 9.4 concludes. Two commentaries are included at the end of the chapter.
Keywords: foreign direct investment, technology transfer, competition, domestic capital market
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