TRANSACTION AND TRANSFER EFFICIENCIES AND THE SIZE OF FDI
This paper develops a general equilibrium model with endogenous international economic structure and international division of labor to identify the forces that determine the size of foreign direct investment (FDI). It shows that the volume of FDI is affected positively by host country's transaction efficiency for final goods and ordinary labor, source country's transaction efficiency for managerial and technical professionals, as well as international transfer efficiency for cross-border movement of managerial and technical professionals; and negatively by difficulty in the production of intermediate goods and international transaction efficiency for traded goods. While consistent with some established hypotheses, the findings have cleared up some misunderstandings in the literature on FDI. It has methodological and theoretical contributions and its findings have rich policy implications in the era of globalization.
FDI, transaction efficiency, organization of economic activity
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