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HOME VERSUS FOREIGN INVESTMENT: A CASE AGAINST CAPITAL EXPORT *
Author(s) -
Frankel Marvin
Publication year - 1965
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.1467-6435.1965.tb00982.x
Subject(s) - yield (engineering) , return of capital , investment (military) , productivity , foreign direct investment , economics , capital (architecture) , return on investment , argument (complex analysis) , rate of return , wage , monetary economics , investment performance , production (economics) , business , labour economics , microeconomics , finance , macroeconomics , history , biochemistry , chemistry , materials science , archaeology , politics , political science , law , metallurgy
SUMMARY Investment brings two kinds of benefits: direct benefits in the form of profits to the investing enterprises; and indirect or development benefits in the form of productivity gains and higher wage rates. Conventional resource allocation precepts, in asserting that enterprises should invest in regions, domestic or foreign, that yield them the largest return, neglect the second type of benefit. If enterprises elect to invest abroad because the return to capital there is marginally higher than at home, then presumably the gains in development accrue to the foreign rather than the domestic economy. A recognition of both types of benefits leads to the conclusion that foreign investment, to be advantageous to the domestic economy, must yield a premium sufficiently in excess of what home investment would yield to compensate for the development benefits that are foregone. This view is given formal support through a suggested framework in which the relations between investment decisions by enterprises, the returns to factors and the indirect development benefits can be explicitly shown. The novelty of the argument lies in the integrating character of this framework, which permits a determination of the premium that foreign investment should earn. The question of whether historically that premium has been earned also is explored.