We study the distributional effects of globalization within a model of heterogeneous agents where both managerial talent and knowledge of the local economic environment are required in order to become a successful entrepreneur. Agents willing to set up a firm abroad incur a learning cost that depends on how different the foreign and domestic entrepreneurial environments are. In this context, we show that globalization fosters FDI and raises wages, output and productivity. However, not everybody wins. The steady state relationship between globalization and income is U-shaped: high- and low-income agents are better off in a globalized world, while middle-income agents (domestic entrepreneurs) are worse off. Thus, consistently with recent empirical evidence, the model predicts globalization to increase inequality at the top of the income distribution while decreasing it at the bottom.

Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents / G. Pica, J.V. Rodríguez Mora. - In: JOURNAL OF INTERNATIONAL ECONOMICS. - ISSN 0022-1996. - 85:1(2011 Sep), pp. 86-101. [10.1016/j.jinteco.2011.04.002]

Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents

G. Pica
Primo
;
2011

Abstract

We study the distributional effects of globalization within a model of heterogeneous agents where both managerial talent and knowledge of the local economic environment are required in order to become a successful entrepreneur. Agents willing to set up a firm abroad incur a learning cost that depends on how different the foreign and domestic entrepreneurial environments are. In this context, we show that globalization fosters FDI and raises wages, output and productivity. However, not everybody wins. The steady state relationship between globalization and income is U-shaped: high- and low-income agents are better off in a globalized world, while middle-income agents (domestic entrepreneurs) are worse off. Thus, consistently with recent empirical evidence, the model predicts globalization to increase inequality at the top of the income distribution while decreasing it at the bottom.
Distributional effects of globalization; Heterogeneous agents; Income inequality; Endogenous TFP; Multinational firms
Settore SECS-P/01 - Economia Politica
Settore SECS-P/02 - Politica Economica
set-2011
Article (author)
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/272988
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