The Korean Economic Review
A Theory of North-South Trade and Foreign Direct Investment
Suyi Kim (Wonkwang University)Year 2010Vol. 26No. 2
We analyze the steady state effect of foreign direct investment (FDI) andglobalization in a dynamic general equilibrium model of North-South Tradewith scale invariant growth developed by Segerstrom and Dinopoulos(2007). Here FDI is defined as the movement of production bases from theNorth to the South by the northern firms because the incentive of FDI is thelower production cost in the South.By our numerical analysis, the increase of exogenous FDI arrival rateleads to a higher imitation rate in the South, industry shift from the North tothe South (the increase of the ratio of the southern imitation firms andmultinational firms compared to the ratio of northern innovation firms) andlower wage inequality between the North and the South. But there is nochange in the long run innovation rate and the decrease of short runinnovation rate. On the other hand, globalization is defined here as theincrease of South population. By my numerical analysis, globalization leadsto less copying of Northern products, faster technological progress, moreindustry shift from the North to the South utilizing the increase inmultinational firms, and greater wage gaps between the two regions.