Foreign Investment in the Presence of an Informal Sector

Abstract

In the context of a segmented economy in which the urban unemployed subsist in informal-sector activities, Earl Grinols (1991) has recently questioned conventional wisdom whereby foreign investme nt with repatriated earnings is necessarily immiserizing for the host country. In this paper, the authors extend Grinols's analysis and pl ace it in a broader context, permitting richer conceptions of informal-sector activities. Their principal finding is that the original insight is surprisingly robust once Heckscher-Ohlin-Samuelson factor intensities are suitably modified and interpreted. The authors' models may also have independent inter est for other work on the informal sector. Copyright 1993 by The London School of Economics and Political Science.