Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents

Sevi Rodriguez Mora, Giovanni Pica

Research output: Contribution to journalArticlepeer-review

Abstract

We study the distributional effects of globalization within a model of heterogeneous agents where both managerial talent and knowledge of the local economic environment are required in order to become a successful entrepreneur. Agents willing to set up a firm abroad incur a learning cost that depends on how different the foreign and domestic entrepreneurial environments are. In this context, we show that globalization fosters FDI and raises wages, output and productivity. However, not everybody wins. The steady state relationship between globalization and income is U-shaped: high- and low-income agents are better off in a globalized world, while middle-income agents (domestic entrepreneurs) are worse off. Thus, consistently with recent empirical evidence, the model predicts globalization to increase inequality at the top of the income distribution while decreasing it at the bottom.
Original languageEnglish
Pages (from-to)86-101
JournalJournal of International Economics
Volume85
Issue number1
DOIs
Publication statusPublished - Sep 2011

Keywords

  • Distributional effects of globalization
  • Heterogeneous agents
  • Income inequality
  • Endogenous TFP
  • Multinational firms

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