We analyze the steady state effect of foreign direct investment (FDI) and
globalization in a dynamic general equilibrium model of North-South Trade
with scale invariant growth developed by Segerstrom and Dinopoulos
(2007). Here FDI is defined as the movement of production bases from the
North to the South by the northern firms because the incentive of FDI is the
lower production cost in the South.
By our numerical analysis, the increase of exogenous FDI arrival rate
leads to a higher imitation rate in the South, industry shift from the North to
the South (the increase of the ratio of the southern imitation firms and
multinational firms compared to the ratio of northern innovation firms) and
lower wage inequality between the North and the South. But there is no
change in the long run innovation rate and the decrease of short run
innovation rate. On the other hand, globalization is defined here as the
increase of South population. By my numerical analysis, globalization leads
to less copying of Northern products, faster technological progress, more
industry shift from the North to the South utilizing the increase in
multinational firms, and greater wage gaps between the two regions.