FOREIGN-INVESTMENT IN THE PRESENCE OF AN INFORMAL SECTOR

In the context of a segmented economy in which the urban unemployed subsist in informal-sector activities, Earl Grinols has recently questioned conventional wisdom whereby foreign investment with repatriated earnings is necessarily immiserizing for the host country. In this paper, we extend Grinols's analysis and place it in a broader context, permitting richer conceptions of informal-sector activities. Our principal finding is that the original insight is surprisingly robust once Heckscher-Ohlin-Samuelson factor intensities are suitably modified and interpreted. Our models may also have independent interest for other work on the informal sector.