On the welfare effects of foreign investment

Modern growth theory emphasizes endogenous technological change as the engi ne of growth. A policy implication for developing countries that has been d rawn from this theory is that foreign direct investment increases growth. H owever, welfare assessments must recognize that investment returns may be r epatriated. In this paper we show that foreign investment may decrease nati onal welfare due to the transfer of capital returns to foreigners. Taking i nto account all the relevant effects, we show that welfare does not change monotonously with FDI and we characterize the conditions that imply a posit ive or a negative welfare effect of foreign investment. (C) 2001 Elsevier S cience B.V. All rights reserved.