International Journal of Business and Economics Volume 1, No. 1 April​, 2002

Quantitative Restrictions and Foreign Investment in a Monetary Economy

Chi-Chur Chao

Department of Economics, The Chinese University of Hong Kong, Hong Kong

Eden S. H. Yu

Department of Economics and Finance, City University of Hong Kong, Hong Kong

Abstract

This paper examines the welfare effect of foreign investment under quantitative restrictions for a host country with a cash-in-advance constraint. This constraint results in a divergence between the consumer virtual prices and the world prices. If the cash required for purchasing exportable goods exceeds that of the importable, additional foreign investment can widen the price divergence and, thus, reduce welfare. This result is contrary to the conventional view that foreign investment is non-immiserizing under quantitative restrictions. On the other hand, if the cash requirement is larger for buying importable goods, foreign investment can still promote welfare.

Keywords：foreign investment, quantitative restrictions, cash in advance.

JEL Classifications：F11, F21, E10.

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