The Welfare Impact of Foreign Direct Investment in an Economic Region

The Welfare Impact of Foreign Direct Investment in an Economic Region

This paper investigates the welfare impact on all member countries when nonmember countries invest in a member of an economic region, in which capital is allowed to move freely. It is shown that the nonmember investment will affects the welfare of all members despite that some members do not receive such investment directly. In general, the results depend on the relative magnitude of the tariff revenue effect, the tax revenue effect and the capital returns effect. Specific conditions for welfare change in each member country as well as the criterion for a common external tariff which ensures welfare improvement in all the member countries are derived.