This paper reconsiders and simplifies the theory of international trade with foreign investment, while concentrating on significant gaps in the analysis of the globally diversified case, where both countries of the two-commodity two-factor model remain incompletely specialized. The analysis goes beyond previous literature by: (1) deriving an important condition for stability of equilibrium; (2) investigating the effects of import tariffs and foreign-investment taxes on the international allocation of capital; (3) examining the actual signs of optimal (first-best and other) tariffs and taxes; and (4) developing new and plausible conditions for existence of global diversification.
Journal of International Economics
Department of Economics

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