Foreign direct investment and international trade in a continuum Ricardian trade model

Abstract

We develop a continuum Ricardian trade model to capture both North-South trade and technology transfer via foreign direct investment (FDI) by multinational enterprises (MNEs). We show that there is a unique range of products produced in the South by MNEs. In the case of an infinitely elastic supply of expatriates, if the ability of Southern workers in absorbing Northern technology increases, then (a) the range of MNE production increases, (b) Northern workers's welfare and Southern workers' welfare change in opposite directions, and (c) the world aggregate welfare increases under certain conditions. We explore issues such as North-South wage gaps, FDI policies and the product cycle. We also derive results under a general supply of expatriates. © 2005 Elsevier B.V. All rights reserved.