Government Policy toward MNEs in the Presence of Foreign Exchange Scarcity

Abstract

While there is a large literature on government policy towards MNEs, the effects of output tradability have not been addressed. In this paper the topic is studied in the context of foreign exchange scarcity and shown to be of crucial importance in determining the effects of government policy toward the MNE. The analysis proceeds by considering two alternative specifications of the output good. In the first case, the output is produced solely for domestic consumption. In the second, the good may be either sold domestically or exported. The effects of government policy in these two scenarios are radically different. These results suggest that the tradability of the output good is part of the explanation of the differing policies adopted by various developing countries towards foreign firms.MNE