A Study on Patterns of Foreign Direct Investment
Heckscher-Ohlin model is a highly abstract and simplified one embodying many restrictive assumption. Hence it is not altogether surprising that the conclusions of traditional analysis do not always stand up well to the facts. Where the identical technologies assumption is retained, factor mobility is found to be sufficient to establish world productive efficiency, while free trade is not. Even we relax the identical technologies assumption, we also find that Foreign Direct Investment (FDI : including the transfer of technology and management) is sufficient to establish world efficiency in production, further, it may serve to increase the volume of world trade. The purpose of this study is to investigate the patterns of Foreign Direct Investment and the relation between FDI and its welfare effect. However, the results show that we cannot make unambiguous comments about potential welfare in either country. But this paper suggests that we should not conclude that technological differences are anything more than the proximate cause of trade. To the extent that FDI(capital movements including the transfer of technology and management) have moved in response to other bases for trade, it is these underlying determinants rather than differences in capital-labour endowments that constitute the more primitive determinants of production and trade.
Departmental Bulletin Paper