FDI with Reverse Imports and Hollowing Out

Abstract

This article addresses plant location by a home firm and its impact on the home economy. Home-wage thresholds for the firm and the home consumer exist. If the foreign wage is below the level equating the two thresholds, the equilibrium plant location is FDI, some of which are involuntary for the firm. If the foreign wage is greater than this level, home production is chosen. A decrease in the fixed cost of FDI may benefit both the firm and the consumer, while an increase in the minimum wage in the home country is not always beneficial to the consumer.