This paper invokes the Stolper-Samuelson properties of two alternative production models in order to describe exactly how the nature of interlinkage between trade liberalization and sector-specific foreign capital depends on the structure of production in a particular country. The possible coexistence of traditional and modern exportable sectors plays the crucial role in the analysis. It is shown that the desire to attract foreign capital will slow down trade liberalization if a country has a sizeable traditional exports sector. On the other hand, a country that has only a modern exportable sector that uses foreign capital, both tariff reductions as well as currency devaluations increase the returns to foreign capital unambiguously. These results help in the understanding of certain stylized facts about foreign capital flows associated with foreign direct investment in recent years.

Note