Working Paper: NBER ID: w7700
Authors: James Markusen; Thomas F. Rutherford; David Tarr
Abstract: Producer services such as managerial and engineering consulting can provide domestic firms with the substantial benefits of specialized knowledge that would be costly in terms of both time and money for domestic firms to develop on their own. These intermediate services are often non-traded, or costly to trade, and are best transferred through foreign direct investment. This has important implications for public policy since policies that impact on foreign direct investment are often quite different from those that impact on trade in goods. We develop a model of these services in this paper. Results show that: (1) while imported services are partial-equilibrium substitutes for domestic skilled labor, they may be general-equilibrium complements, (2) imported services lead to differential productivity effects in final goods production so that, for example, the pattern of trade in goods can reverse when FDI is permitted, and (3) the optimal tax on FDI (which we do not advocate as a practical matter) is negative.
Keywords: Foreign Direct Investment; Producer Services; Economic Growth; Welfare; Trade in Services
JEL Codes: F13; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI in producer services (F23) | productivity of domestic skilled labor (J24) |
| imported services (L89) | productivity of domestic skilled labor (J24) |
| imported services (L89) | demand for domestic skilled labor in a specific sector (J23) |
| availability of imported services (F10) | efficiency and output of domestic industries (L16) |
| FDI in services (F23) | economic growth (O49) |
| optimal tax on FDI (F23) | economic benefits (D61) |