Welfare of Host Countries: Foreign Investment as a ‘General’ Inflow of Capital

Abstract

The traditional method of analysing the effects of foreign investment has been to treat it as a ‘general’ inflow of capital from abroad, and to use the standard tools of neoclassical welfare, trade and growth theory to work out its impact on the host economy. By a ‘general’ inflow of capital we mean one or both of two things: first, in the narrow usage of ‘pure’ trade theory, direct investment inflows often are not distinguished from other types of capital inflows (loans, portfolio investments) from abroad, the whole being treated as foreign ‘borrowing’; second, in a slightly broader sense, foreign direct investment is differentiated from other capital inflows—but by virtue of the fact that profits rather than interest are paid abroad, and that the risk element is rather different—but the main distinguishing features of the large oligopolists (which in fact dominate international investment) are not taken into account in any significant way.