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Should the Host Economy Invest in a New Industry?

Abstract : We consider a small open economy with two sectors (an old sector producing a consumption good and a new sector producing a new good), two production factors (physical capital and specific labor), and two heterogeneous firms in the new sector (a multinational firm and a domestic firm). First, our framework highlights that in a poor country with low return of training and weak FDI spillovers, the domestic firm cannot exist in the new industry requiring a high fixed cost. Second, once the host country holds necessary conditions to create a domestic firm, its productivity is the key factor allowing it to enter the new industry, and even eliminate the multinational firm. Interestingly, credit constraint and labor/capital shares play important roles in the competition between firms.
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Contributor : Thanh Tam Nguyen-Huu <>
Submitted on : Friday, July 17, 2020 - 2:18:55 PM
Last modification on : Wednesday, October 14, 2020 - 8:40:04 AM


  • HAL Id : hal-02901674, version 1


Thanh Tam Nguyen-Huu, Ngoc-Sang Pham. Should the Host Economy Invest in a New Industry?. Revue Economique, Presses de Sciences Po, 2018, 69 (1), pp.29-65. ⟨hal-02901674⟩



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