Abstract

North-South foreign direct investment (FDI) is frequently viewed as a process in which
jobs relocate from the North to the South. I build a growth model with two asymmetric
trading economies, the North where firms innovate and the South where Northern firms
invest to take advantage of lower wages. Contrary to expectation, I find that lower FDI
costs increase unemployment both in the North and in the South. There are two effects
of FDI on unemployment, a direct positive one which contributes to the turnover of firms
parallel to innovation. The indirect effect appears through innovation and growth: more FDI
means higher innovation, this intensifies firm turnover and increases the unemployment
rates in both countries even further. I solve the model analytically without trade costs and
imitation of products in the South. For the version with trade costs and imitation I offer a
numerical solution in which I also look at the effect of FDI on welfare and find a positive
relation. In addition to FDI, I explore how intellectual property (IP) rights protection affects
unemployment and welfare. Both are higher in a steady state with stricter IP protection.