| In the last decade, the establishment of export enclaves to attract foreign direct investment (FDI) and the formation of regional trading blocs among the members of the World Trade Organization took a prominent role in international trade. The first essay analyzes the consequence of inflows of FDI in export enclaves on the real exchange rate (RER). Established wisdom is that an increase in FDI in the tradable sector will appreciate the RER. In a small open economy with three sectors---a nontraded, an exportable, and an importable---it is shown that the RER could appreciate or depreciate from FDI depending upon the economy-specific factors, such as the income and price elasticities of demand, share of exportables, importables, and nontradables in the national income, supply-side elasticities, and the share of national income repatriated.; The second essay empirically tests the relationship between FDI and economic growth using an unbalanced annual panel dataset for 20 countries in Latin America and the Caribbean for the period of 1990--2001. By treating FDI and economic growth as endogenous variables, a two-equation simultaneous equation system is estimated with the time-averaged three-stage least squares (3SLS), classic pooled 3SLS, within 3SLS, and error-components 3SLS estimates. Our empirical estimates show that FDI and growth are important determinants for each other in these economies as the coefficients are positive and statistically significant. Additionally, per capita export, infrastructure, domestic investment, RER, and a dummy variable for the 1999--2001 time intervals are found to be important determinants for FDI. Moreover, export growth, inflation rate, risk index, and the dummy variable for the 1999--2001 time intervals are found to be important factors for economic growth in this region.; The third essay discusses the issue of why the developing economies are expecting to gain from FDI, even though several results of the received literature in the international trade argue that foreign investment will lower the economic welfare for the capital recipient's economies pursuing protectionist trade policies. Using a general equilibrium model of a protected developing economy, we demonstrate that imperfect labor mobility may eliminate the possibility of immiserizing growth from foreign investment in an export enclave, by allowing job creation to countervail losses in tariff revenue. |
