Who's Afraid of a Globalized World? Foreign Direct Investments, Local Knowledge and Allocation of Talents

55 Pages Posted: 26 Oct 2009 Last revised: 15 Nov 2012

See all articles by Giovanni Pica

Giovanni Pica

Idep, facoltà di economia; University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

José V. Rodríguez Mora

Universitat Pompeu Fabra

Date Written: September 28, 2009

Abstract

We study the distributional effects of globalization within a model of heterogeneous agents where both managerial talent and knowledge of the local economic environment are required in order to become a successful entrepreneur. Agents willing to set up a firm abroad incur a learning cost that depends on how different the foreign and domestic entrepreneurial environments are. In this context, we show that globalization fosters FDI and raises wages, output and productivity. However, not everybody wins. The steady state relationship between globalization and income is U-shaped: high- and low-income agents are better off in a globalized world, while middle-income agents (domestic entrepreneurs) are worse off. Thus, consistently with recent empirical evidence, the model predicts globalization to increase inequality at the top of the income distribution while decreasing it at the bottom.

Keywords: Distributional Effects of Globalization, Heterogeneous Agents, Income Inequality, Endogenous TFP, Multinational Firms

JEL Classification: E61, F23, F41

Suggested Citation

Pica, Giovanni and Rodríguez Mora, José V., Who's Afraid of a Globalized World? Foreign Direct Investments, Local Knowledge and Allocation of Talents (September 28, 2009). Journal of International Economics, Vol. 85, No. 1, 2011, Available at SSRN: https://ssrn.com/abstract=1494263 or http://dx.doi.org/10.2139/ssrn.1494263

Giovanni Pica (Contact Author)

Idep, facoltà di economia ( email )

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University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

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University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

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CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

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Naples, Naples 80126
Italy

José V. Rodríguez Mora

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain

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