Welfens, P.J.J.: Optimal Inward Foreign Direct Investment Share within an International M&A Setting

Welfens, P.J.J.: Optimal Inward Foreign Direct Investment Share within an International M&A Setting

JEL classification: E6, F15, F21, F23, F41

Key words: FDI, technology transfer, optimal economic policy, economic welfare analysis, Schumpeter

Summary:

Cumulated inward foreign direct investment has two major macroeconomic effects: (i) on the one hand, there is a positive international technology transfer effect on real GDP (ii) on the other hand, real national income is reduced by profit remittances to the source country. This naturally leads to the question of an optimal FDI share in the total capital stock, namely for maximizing real national income. The analysis presented herein derives new results for the rather simple case of asymmetric inward foreign direct investment and the setting of international mergers & acquisitions. Moreover, an enhanced neoclassical growth model also shows new results for the golden age – the approach assumes that the output elasticity can change and that the FDI inward intensity will affect the output elasticity of capital; empirical evidence for OECD countries is presented. From this transparent analytical framework, clear results for optimal inward FDI are obtained and the implications are indeed relevant in a modern macroeconomic research perspective which includes FDI analysis in open economies. There are crucial economic policy implications for policy makers as well international organizations; the approach also can be integrated into DSGE models.

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