QUID PRO QUO FOREIGN INVESTMENT AND VERS: A NASH BARGAINING APPROACH*

Authors


  • *

    Paper prepared for the Conference on Political Economy and International Economics, at Columbia University in New York, 16–17 February 1990. I would like to thank Rodney Ludema for extremely helpful remarks and suggestions. I would also like to thank Jagdish Bhagwati, Leonard Cheng, Koichi Hamada, Larry Kenny, David Sappington, Stergios Skaperdas, Kar-yiu Wong, and participants in the International and Development Economics Workshop at the University of Florida for useful comments. Any remaining errors are the sole responsibility of the author.

Abstract

We construct a two-period model of industry-specific quid pro quo direct foreign investment (DFI) which occurs with the view to increasing the level of a future voluntary export restraint (VER). The wage and the VER are determined through Nash bargaining.

We identify the conditions which generate quid pro quo DFI and examine its effects on profits, the utility of the union and welfare. In the absence of political-economy considerations, more DFI increases the degree of endogenous protection.

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