Foreign Direct Investment to Developing Countries: Technological Externalities and Welfare Gains

Sebastian Rausch

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Diploma Thesis from the year 2005 in the subject Economics - International Economic Relations, grade: 1,0, University of Bonn, la...

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Diploma Thesis from the year 2005 in the subject Economics - International Economic Relations, grade: 1,0, University of Bonn, language: English, abstract: This work analyzes under what conditions Foreign Direct Investment (FDI) flows to developing countries occur and what host country characteristics determine the extent of benefits associated with FDI. Using a numerical two-country general equilibrium model in which (vertical) FDI arise endogenously I compare welfare situations for the developing country before and after FDI liberalization. I specifically focus on the welfare potential of technological externalities arising from the activity of MNEs. These spillover effects stemming from the transfer of foreign technology and skills to local industries are shown to be welfare-improving if the host country, in particular local firms, possess the ability to absorb benefits from FDI.