Abstract
This paper investigates the welfare impact on all member countries when nonmember countries invest in a member of an economic region, in which capital is allowed to move freely. It is shown that the nonmember investment will affects the welfare of all members despite that some members do not receive such investment directly. In general, the results depend on the relative magnitude of the tariff revenue effect, the tax revenue effect and the capital returns effect. Specific conditions for welfare change in each member country as well as the criterion for a common external tariff which ensures welfare improvement in all the member countries are derived.
Highlights
The world is entering the last decade of the century in the midst of profound and rapid change
We have summarized the findings in the following proposition: Proposition l: In a three-country, two-good specific factor model, assume (l) two countries A and B form an economic region where the specific factor in the importable sector, capital, is perfectly mobile, (2) the economic region faces exogenous world prices and imposes a common external tariff. (3) country j taxes capital income owned by member countries at the rate τj and country A taxes nonmember capital income at τ, and
Using a specific factor model with capital as the specific factor of the tariff-protected importable sector, we have shown that the welfare of a member country will be affected by investment from nonmember countries even though the member country itself does not host the nonmember foreign direct investment (FDI)
Summary
The world is entering the last decade of the century in the midst of profound and rapid change. The impact of FDI on national welfare has long been a subject of interest in the international trade literature Papers such as MacDougall [1960], Brecher and Diaz Alejandro [1977], Brecher and Findlay [1983] and Srinivasan [1983] are well-known. Myagiwa and Young [1996], in particular, have focused on the economic interdependencies arising from capital movements within the economic region when they study the welfare impact of a member country's commercial policy Interesting as they are, the problems dealt with by Miyagiwa and Young are more relevant to the investment diversion effect within the region.
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