Europe 1992, and The Liberalization Of Direct Investment Flows: Services Versus Manufacturing Francisco L. Rivera-Batiz.

Abstract

The European integration of 1992, offers to open-up the service sector of EC countries to substantial investment flows from other member nations. This paper studies how the elimination of restrictions on the flow of foreign capital into services affects the economic welfare of a recipient economy. A model of increasing returns due to specialization is developed in which capital is sector-specific; this model is used to examine the differential impact of foreign capital inflows into the service and manufacturing sectors. It is shown that direct foreign investment in the service sector has positive effects on national welfare that investment in manufacturing may lack. [F 15]