Foreign Investment with Endogenous Protection

Abstract

Jagdish Bhagwati coined the phrase quid pro quo foreign investment to describe international investments made in anticipation of host country trade policy and perhaps with the intention of defusing a protectionist threat.We apply Ehagwati's notion to situations where (i) foreign investment is best described as the (uncoordinated) opening of branch plants by multinational corporations, and (ii) protection is a political response by an incumbent government to offers of policy-contingent campaign contributions by domestic firms.We examine the determinants of anticipatory foreign investment and study some of its welfare implications.We also allow for lobbying by workers with sector-specific skills and show how the conflicting interests of these workers and the industrialists are resolved in determining policy toward foreign investment.

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