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Macroeconomic Adjustment under Foreign Investments

Published online by Cambridge University Press:  17 August 2016

Jean-Marie Viaene
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Abstract

Foreign investment involves transactions which can be described by six dimensions : (1) the financing package, (2) the level of utilization of resources to be employed in the project, (3) the import content of factors needed in the equipment of the new plant, (4) the import content of inputs needed in production, (5) the production mix and (6) the proportion of repatriated profits. This paper aims at developing a two-commodity flexible price and quantity model which recognizes these central characteristics, and exploring the nature of macroeconomic responses to foreign investments in a small open economy.

The analytical results give conditions for welfare and balance of payments improvements for the general case and, as a by-product, for the corresponding Keynesian fixed-price or classical fixed-quantity model. It is shown how they crucially depend upon a set of parameters among which the degree of substitution or of complementarity between domestic and foreign production in the host country plays a key role. Most of these parameters are identifiable in either the empirical literature or in existing econometric models, which permits empirical verification and country comparison. On the basis of Dutch and Spanish data, the results support the evidence of a current account deficit in both countries and of minor welfare improvement for the Netherlands but substantial welfare gain for Spain.

Type
Part Three: Foreign Investment and Factor Mobility
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 50 , Issue 3-4 , 1984 , pp. 197 - 213
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1984 

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Footnotes

*

Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, the Netherlands.

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