Endogenous Determination of FDI Growth and Economic Growth:The OECD Case



Y=F(K*,N)
where Y is output, K * is total physical stock available in the domestic economy, and N is
labor stock. The optimization conditions for the representative firm entail equality between
the marginal products and the factor prices:

(3)


f '( k *) = r

(4a)

(4b)


f ( k *) - k * f ( k *) = w

In (4), k * is capital per person that exists in a domestic country at a particular time, w is the
real wage rate, and
r is the world’s real rate of interest. Capital accumulation function for the
domestic resident is

(5)

where k is capital per person owned by domestic residents, n is the population growth rate,
c is the consumption. If we substitute for w from equation (4b) and for r from equation (4a)
into equation (1), the change in assets per capita can be determined as

k& = f (k*)-r(k* -k) -nk -c

(6)


k * - k represents the sum of foreign investments per capita in the domestic country and
without loss of generality, we assume that
k* -k > 0. Note from equation (6) that it would
become the standard equation of motion of Ramsey if the economy were closed,
k* -k = 0.
The difference between equation (6) and the macroeconomic budget constraint of Ramsey
model is that the domestic economy is incurring rental cost for the total foreign capital that
t

came in until time t . By definition, it must be true that k* - k =FDIdt , where FDI is the
0

physical capital inflow from abroad at time t . If we take time derivative of this identity, we
obtain that
k& * - k& = FDI . Hence, we may alternatively express equation (6) as follows:

k&* = f(k*)-r(k*-k)-nk-c+FDI

(7)


* . ʃz,^ ɪ,             ɪ У y y .   _ У   f '( k ɔ k * ^    1 ,ʌʌɪ-

Given that y = f (k ), the growth rate of output is g = — =   —*--*. Substituting

y                     f(k*) k*

k&*

respective value of — from (7), we may express growth rate of output as
k*

= f '(k∙)k Γfτ._r (k*-k) -nk- c_ + fdl

gy        Z∕J*        7*      '      7* n 7* 7*      7*

f ( k )    k k k k k



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