Trade, Wages, FDI and Productivity

We extend the Behrens et al. (2009) general equilibrium heterogeneous firms framework by horizontal foreign direct investment. The model features endogenously determined firm entrants, wages, productivity cutoff s, flexible price markups and allows for wage differentials across countries in equilibrium. The framework is especially suitable to analyze the welfare consequences of attracting FDI since it allows to study through which channels FDI might raise welfare - including the not yet explored impact on the wage differential and the price markups. From a policy perspective we compare a strategic and a cooperative FDI policy scenario and find that supranational coordination leads to welfare gains.