Foreign direct investment, urban unemployment and welfare

The effects of foreign direct investments on welfare and unemployment are examined in the case where there is urban unemployment. Our main findings are that an increase in foreign capital investment leaves social welfare intact and reduces unemployment if foreign capital is specific to foreign firms, and it may increase social welfare and reduce unemployment if foreign capital is also used in the domestic manufacturing sector. Thus, our analysis is consistent with many empirical evidences that emerging economies employ export processing zones or duty free zones intensively as their development strategies.