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Foreign Direct Investment, Geography, and Welfare

September 2024

Working Paper Number:

CES-24-45

Abstract

We study the impact of FDI on domestic welfare using a model of internal trade with variable markups that incorporates intranational transport costs. The model allows us to disentangle the various channels through which FDI affects welfare. We apply the model to the case of Ethiopian manufacturing, which received considerable amounts of FDI during our study period. We find substantial gains from the presence of foreign firms, both in the local market and in other connected markets in the country. FDI, however, resulted in a modest worsening of allocative efficiency because foreign firms tend to have significantly higher markups than domestic firms. We report consistent findings from our empirical analysis, which utilises microdata on manufacturing firms, information on FDI projects, and geospatial data on improvements in the road network.

Document Tags and Keywords

Keywords Keywords are automatically generated using KeyBERT, a powerful and innovative keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant keywords.

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:
market, econometric, export, international trade, monopolistic, sector, multinational, foreign, expenditure, economically, revenue, gdp, fiscal, globalization

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:
International Trade Commission, Foreign Direct Investment, 2SLS, TFPQ, International Standard Industrial Classification

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