Two-way capital flows: cross-hauling in a model of foreign investment

This paper presents a simple model of a small open economy which is open to both commodity trade and foreign investment of a sector-specific kind, and which exhibits the phenomenon of ‘cross-hauling’, or reverse flows of internationally mobile capital in two different sectors. The model, which assumes that a single domestic factor is combined with internationally mobile but sector-specific capital in each of two sectors, one of which produces a non-traded good, appears to be the simplest possible which permits cross-hauling as an endogenous phenomenon.