Foreign direct investment and the political economy of protection

This paper makes the point that an import-competing industry may not want m aximal protection. The reason is that a high level of protection encourages inward foreign direct investment, which could be even less desirable than import competition. A government captured by the domestic import-competing industry consequently will set the level of protection low enough to limit direct foreign entry. This paper also establishes results regarding the for m of protection. Voluntary export restraints are shown to be the domestic i ndustry's desired means of protection, because leaving export rents with fo reigners inhibits foreign direct investment.