Migrant Business Networks and FDI



variables of the developing economy will be identified by the sign * . Hence, Nt* = Nt , ht* = ht and
equations from (1) to (6) become equations (1*) to (6*).

There may be various reasons for the wage gap between the two economies. In Lucas (1990)
it is due to a structural difference in the endowment of human capital between the developed and
the developing countries. With
A(Ht)>A*(Ht*), the return to capital and the capital per worker ratio
will be lower in the developing economies. Hence, despite the lower wages, capital, will not flow to
the developing countries as predicted by standard theory.

Another possible source of the difference in wages follows from the existence of the
informal barriers that impede trade and investments in the international markets. In the model, they
are represented by the “risk factor”,
π. These barriers may be higher for the developing economies,
πt* πt. With this assumption, even if A=A*, all other things equal, from (4*) and (5*) follows that
the developing country’s equilibrium wage and capital per worker ratio will be lower than those of
the rich economy,
w*< w and k*< k. Hence, the higher informal barriers are sufficient to make the
developing country a net emigration economy that receives less FDI from abroad of what would be
predicted by standard theory. As in Lucas (1990) the countries’ FDI tend to remain within the group
of the developed economies, where risks are lower and the returns to capital are higher.

Let’s now consider international migration. The effects of the skilled and unskilled
immigration in the developed country have been seen in the previous Section. The impact of
migration on the developing economy variables can be separated into two components. A direct
one, which concerns the modifications of the average level of human capital and of the labor force,
A*( Ht*) and L*t , and an indirect one, which is the modification in the informal barriers, or risk
factor
πt* , induced by the international networks of immigrants. The direct effects are symmetrical
to those of the developed economy. They can be deduced from
L*t = (N*t +MtU +MtS)H*t and

* Nt*[Pt*(h-1)+1]-MtU-MtSh                                            *'         *'

Ht = —-— --------------t------t. In this equation the derivatives are HU > 0, HS < 0, while

t          Nt-MtU -MtS                                             U S

HP*' 0 . In words, the emigration of skilled individuals decreases the average human capital of the
origin country, while the emigration of unskilled individuals improves it. In both cases
L*-
decreases.

The country “risk factor”, π-*, depends on Z-*, a set of variables regarding political stability,
corruption, culture, social norms, institutions and, following the literature on networks, the
international links built by migrants. The latter lower the uncertainty and distrust of foreign



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