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Sector-specific foreign direct investment, factor market distortions and non-immiserising growth

Mukherjee, Soumyatanu (2013): Sector-specific foreign direct investment, factor market distortions and non-immiserising growth.

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Abstract

This paper explores a 3×3 full-employment H-O-S model with tariff-protection in the capital-intensive import-competing sector and inflows of FDI (foreign direct investment) to an export sector (using foreign capital as a specific input) within the ‘foreign enclave’ of a small open developing economy; whereas there are labour market distortion in the domestic organised tariff-protected import-competing sector and capital market distortion in the domestic unorganised sector of this typical economy. I have considered implications of sector-specific foreign capital inflows on national income (or social welfare, crudely however) of the economy under two different scenarios: when entire income from foreign capital is fully repatriated back to the source country; and when supply of FDI is a positive function of net return to foreign capital in the recipient country, coupled with labour-augmenting type technology transfer. It is found that the possibility of non-immiserising growth improves in the presence of labour market distortion in the organised sector while credit market imperfection in the unorganised sector deteriorates it. However in the presence of technology transfer, existence of labour market distortion is no longer a necessary condition for obtaining such result due to foreign capital inflows to the foreign enclave of this small open developing economy. Existence of output-generated increasing returns in the sector within the foreign enclave will not alter our results; while under the second scenario it will enhance the possibility of non-immiserising growth by raising the tax-revenue from foreign capital income in the host country through increasing the rental to foreign capital. These results are counter-intuitive with respect to the existing theoretical results suggesting immiserising growth owing to sector-specific foreign capital inflows using 3×3 or 2×3 full-employment models without any linkages.

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