Foreign direct investment in developing countries: Motives, structures and impacts

The three chapters of this thesis examine foreign direct investment (FDI) in developing countries at three levels. The first chapter models the decision of a firm that intends to expand to a developing country. Differing from most literature to date, the firm here faces an unknown demand function and is risk-averse. In this setting, investing in a developing country not Only eliminates transport cost and reduces labor cost, but also provides more demand information. This chapter reveals the mechanism in which the price of the product serves as a signal for the firm to update its beliefs about local demand. When a firm invests abroad, it is able to gather more market information than distant exporters, and reduces risks.;Chapter Two examines the industrial structure of FDI, in the context of a major policy reform such as the accession of China into the World Trade Organization (WTO). This chapter distinguishes between the vertical type and the horizontal type of FDI and purposes a theoretical framework that unifies two brands of literature and treats two types of investment in a consistent fashion. The numeric experiments show that a tariff-reduction will cause a sizable increase in the share of foreign investment in labor intensive industries.;Chapter Three concentrates on the macroeconomic impact of FDI on a developing economy, focusing on the relationships among migration, growth and income distribution. In a spatial general equilibrium model, market orientation of FDI (close to market) determines that investment will locate in a coastal area, thus creating migration as well as wage disparities among people in various sectors and geographical locations. This chapter also analyzes the effects of a range of policies and concludes that no individual policy itself can both enhance growth and reduce income inequalities. Policies have to be applied in combination with each other.;This dissertation draws most of its evidences and data from China, but many characteristics exhibited in China are also present in other developing countries. As a result, models and methods in this dissertation can be extrapolated to the study of a range of developing countries.