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Arijit Mukherjee
''Firm productivity, foreign direct investment and the host-country welfare: trade cost vs. cheap labor''
( 2008, Vol. 6 No.23 )
We show that the relationship between higher productivity of the foreign firm and host country welfare depends on the reason for foreign direct investment (FDI). If the reason for FDI is to get the advantage of cheap labor, higher productivity of the foreign firm may reduce host-country welfare. Higher productivity of the foreign firm always increases host-country welfare if the reason for FDI is to save transportation costs but may reduce it if trade costs consist of tariffs. Thus, the present paper complements the recent literature on international trade that explores the effects of foreign firms' productivities on the incentives for FDI.
Keywords: Cheap labor Foreign direct investment Host-country welfare Trade cost
JEL: F2 - International Factor Movements and International Business: General
F1 - Trade: General
Manuscript Received : Jun 10 2008 Manuscript Accepted : Jun 11 2008

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