Foreign Capital, Processing Incentives, and Urban Unemployment

We use a general equilibrium model of a small developing economy with urban unemployment to illustrate the impact of processing incentives in the presence of foreign owned factors of production. We show that the location of the processing industry plays a crucial role in determining whether or not processing incentives will raise welfare through employment effects, but, once stability conditions are imposed, does not alter the positive investment terms-of-trade effect resulting from foreign ownership of resources.