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
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
What Drives International Bank Flows? Politics, Institutions and Other Determinants
-
By Ashoka Mody, Assaf Razin, ...
-
By Ashoka Mody, Assaf Razin, ...
-
Gains from FDI Inflows with Incomplete Information
By Assaf Razin and Efraim Sadka
-
Lending Booms, Sharp Reversals and Real Exchange Rate Dynamics
-
Which Countries Export FDI, and How Much?
By Assaf Razin, Yona Rubinstein, ...
-
Which Countries Export FDI, and How Much?
By Assaf Razin, Yona Rubinstein, ...
-
Bilateral FDI Flows: Threshold Barriers and Productivity Shocks
By Assaf Razin, Efraim Sadka, ...