Foreign Capital, Urban Unemployment and Economic Growth

Utilizing a three-sector endogenous growth model, we study the effects of foreign direct investment (FDI) on the dynamics of urban unemployment, labor income and capital income as well as national welfare in a Harris-Todaro economy. It is shown that more FDI can affect the economy's dynamics and national welfare in either way, positively or negatively. Further, we derive the conditions as to how the growth rate and welfare effects of FDI relate to the intersectoral mobility of capital, the destination of FDI, the elasticities of substitution, and the factor intensities of the final good production