Working Paper: NBER ID: w4876
Authors: Gene Grossman; Elhanan Helpman
Abstract: Jagdish Bhagwati coined the phrase quid pro quo foreign investment to describe international investments made in anticipation of host country trade policy and perhaps with the intention of defusing a protectionist threat. We apply Bhagwati's notion to situations where (i) foreign investment is best described as the (uncoordinated) opening of branch plants by multinational corporations, and (ii) protection is a political response by an incumbent government to offers of policy-contingent campaign contributions by domestic firms. We examine the determinants of anticipatory foreign investment and study some of its welfare implications. We also allow for lobbying by workers with sector- specific skills and show how the conflicting interests of these workers and the industrialists are resolved in determining policy toward foreign investment.
Keywords: Foreign Investment; Trade Policy; Lobbying; Welfare Implications
JEL Codes: F21; F23; D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased lobbying (D72) | changes in trade policy (F13) |
| changes in trade policy (F13) | anticipatory foreign investment (F21) |
| political strength of domestic groups (F52) | government trade policy (F13) |
| higher contributions (D64) | more protectionist policies (F52) |
| weight of average voter welfare increases (D69) | rate of protection may rise (D18) |