Welfare consequence of capital inflow for a small tariff-protected economy

Capital inflow is generally immiserizing when the capital intensive import competing sector is tariff protected and profits are repatriated in full. In this paper, we construct a model with increasing returns, embedded in a monopolistically competitive market to show that capital inflow might lead to higher factor income and interestingly enough, growth of import competing sector might lead to still higher imports. Thus, two distinct possible channels are identified through which welfare might improve. (C) 2001 Elsevier Science B.V. All rights reserved.