Foreign Direct Investment into Open and Closed Cities

Abstract

AbstractThis article argues that the more open a city is to immigration, the more likely it is to welcome – and hence also receive – foreign direct investment (FDI). If immigration is allowed to complement the inflow of foreign capital, urban rent rises by more. This extra rise in rent aids in appeasing owners of capital specific to local traditional industries who else become worse off as FDI flows in. The article's model may help give a simple alternative explanation of why urban centers such as Hong Kong, Singapore, Dublin or many cities on China's Eastern coast have received so much more FDI per capita. These cities could draw on a nearby pool of extra labor that – by driving rents up and keeping wages down – may have been decisive in the political struggle over whether to let foreign direct investors in.