On the welfare effects of foreign investment

Abstract

Modern growth theory emphasizes endogenous technological change as the engine of growth. A policy implication for developing countries that has been drawn from this theory is that foreign direct investment increases growth. However, welfare assessments must recognize that investment returns may be repatriated. In this paper we show that foreign investment may decrease national welfare due to the transfer of capital returns to foreigners. Taking into account all the relevant effects, we show that welfare does not change monotonously with FDI and we characterize the conditions that imply a positive or a negative welfare effect of foreign investment.