NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Foreign Investment with Endogenous Protection

Gene Grossman, Elhanan Helpman

NBER Working Paper No. 4876
Issued in October 1994
NBER Program(s):   ITI

Jagdish Bhagwati coined the phrase quid pro quo foreign investment to describe international investments made in anticipation of host country trade policy and perhaps with the intention of defusing a protectionist threat. We apply Bhagwati's notion to situations where (i) foreign investment is best described as the (uncoordinated) opening of branch plants by multinational corporations, and (ii) protection is a political response by an incumbent government to offers of policy-contingent campaign contributions by domestic firms. We examine the determinants of anticipatory foreign investment and study some of its welfare implications. We also allow for lobbying by workers with sector- specific skills and show how the conflicting interests of these workers and the industrialists are resolved in determining policy toward foreign investment.

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Document Object Identifier (DOI): 10.3386/w4876

Published: in R.Feenstra, G.M.Grossman and D.Irwin(eds.), The Economy of Trade Policy Cambridge: The MIT Press, 1996, pp. 199-223.

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