6742017-06 , Institute of Developing Economies (IDE-JETRO)
To prepare an answer to the question of how a developing country can attract foreign direct investment (FDI), this paper explored the factors and policies that may help bring FDI into a developing country by utilizing an extended version of the knowledge-capital model. With a special focus on the effects of a free trade agreement (FTA) or an economic partnership agreement (EPA) between a pair of market and non-market countries, simulations with the model revealed the following: (1) although FTA/EPA generally tends to increase FDI to a developing country, the possibility of improving welfare through increased demand for skilled and unskilled labor decreases as the size of the country grows; (2) a developing country may suffer severe welfare losses through FTA/EPA if the availability of skilled labor is extremely limited; and (3) a developing country can enhance welfare gains from a FTA, and it is even possible to recover the welfare effects from negative to positive, by making the arrangement an EPA.
JEL:F11 - Neoclassical Models of Trade JEL:F12 - Models of Trade with Imperfect Competition and Scale Economies • Fragmentation JEL:F15 - Economic Integration JEL:F23 - Multinational Firms • International Business Developing Countries Foreign investments International business enterprises International agreements International trade Foreign direct investment Multinational enterprise Export platform Complex integration Free trade agreement Economic partnership agreement
Institute of Developing Economies (IDE-JETRO)
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