Foreign capital inflow and its welfare implications in a developing country context

Abstract

In a small open developing country context, the author considers a three-sector general equilibrium framework and tries to find out the effects of foreign capital inflow on welfare of the country. Comparative-static results show that foreign capital inflow widens the skilledunskilled wage gap under some reasonable conditions, although it causes an expansion of the foreign enclave and the agricultural sector and contraction of the domestic manufacturing sector. Taking sector specific foreign capital, the authors find that foreign direct investment is beneficial in a free market small open economy in the absence of tariff. Economics: The Open-Access, Open-Assessment E-Journal 11 (2017-17) www.economics-ejournal.org 1 IntroductionThe impact of foreign-capital inflow on the welfare of a developing economy has always been a subject of immense interest among the policymakers and the academicians. The famous Brecher-Alejandro's (1977) proposition, based on the theoretical works by Bhagwati (1958), Johnson (1967), andBhagwati (1973), is a benchmark in this context. The work of BrecherAlejandro (1977) has successfully analysed the effects of foreign-capital inflow on the welfare of an economy. In a two-commodity, two-factor framework, characterized by the presence of full employment, they have shown that, if the relatively capital-intensive sector is protected by tariff and, the income from foreign capital is fully repatriated, then, an increase in foreigncapital inflow would cause a loss in welfare of a country. However, the inflow of foreign capital cannot influence the welfare of a country if the import-competing sector is not protected. This is the famous Brecher-Alejandro's (1977) proposition of the trade theory. The work of Khan (1982) has also thrown light on this in a Harris-Todaro's (1970) framework of urbanunemployment. The result of Khan's work also supports the Brecher-Alejandro's (1977) proposition.Beladi and Marjit (1992a) have re-examined the Brecher-Alejandro's (1977) proposition in a full-employment model proposed by Heckscher-Ohlin-Samuelson, in the presence of an export-processing-zone (EPZ) that uses the sector-specific foreign capital. According to their work, the inflow of foreign capital obstructs the national welfare if the country imports capitalintensive goods while the import-competing sector is protected. Contrarily, if the country imports labour intensive commodity, the expansion of the EPZ will make the country better off.In an another work, Beladi and Marjit (1992b) have considered a three-sector model in which one sector is EPZ that uses sector-specific foreign capital in a subsystem proposed by Heckscher-Ohlin-Samuelson. In this model, skilled labour force is fully employed and the market of unskilled labour is characterized by the presence of unemployment. This work invents the conditions under which one can find out the negative effect of foreign-capital inflow on welfare of a country. It happens when the foreign capital is not injected directly into the importcompeting sect...

The Impact of Greenfield-FDI on Socio-Economic Development of Pakistan

“…It was suggested by [Sen, 1998] that the development of a country should be considered in a broader sense, taking into account the availability of good health care facilities, access to modern education, and a decent standard of living. Many researchers contributed to measuring the human development of a country by taking different aspects into account, such as the quality and availability of agriculture products, the level of poverty, crime, environmental pollution, health, housing, nutrition, human capital, education, and life expectancy [Wahedi, 2011;Azam, Gavrila, 2015;Mukherjee, 2017]. Using GDP or GNP per capita as a measurement for human development has a lot of conceptual shortcomings noted by many authors [Kuznets, 1947;Nordhaus, Tobin, 1973;Sen, 2000].…”

Does Greenfield Foreign Direct Investment Inflow contribute in Socioeconomic Development? Empirical Evidence from Developing Countries

“…The socio-economic development should take place in the broader context, such as access to technological schooling, an adequate living standard, and good health facilities (Sen, 1998). Many researchers have contributed to calculating a country's socio-economic growth by taking into account various socio-economic instruments such as schooling, health, life expectancy, poverty, housing, nutrition, crime, agricultural products, and environmental pollution (Azam & Gavrila, 2015;Mukherjee, 2017;Raza et al, 2021). The definition of the Human Development Index (HDI) introduced by (Haq, 1995) is a combination of health and education and standard of living adopted by the United Nations (UN) as a standard metric for computing socio-economic development.…”