On the welfare effects of foreign investment

Modern growth theory emphasizes endogenous technological change as the engine of growth. A policy implication for developing countries that has been drawn from this theory is that foreign direct investment increases frowth. However, welfare assessments must recognize that investment returns may be repatriated. In this paper we show that foreign investment may decpease national welfare due to the transfer of capital returns to doreigndrs. Taking into account all the relevant effects, we show that welfare does not change monotonously with FD1 and we characterize the conditions that imply a pmsitive or a negative welfare effect of foreign investeent.